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(Address of principal executive offices) (Zip Code)
(i615)
i771-7575
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock, $0.01 par value per share
iDVCR
OTCQX
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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. iYes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). iYes☒ No ☐
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 the definitions 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
☐
Accelerated filer
☐
iNon-accelerated
filer
☒
Smaller reporting company
i☒
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
i6,952,773
(Outstanding shares of the issuer’s common stock as of May 5, 2021)
Part I. FINANCIAL INFORMATION
ITEM 1
– FINANCIAL STATEMENTS
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
(Dollars and shares in thousands, except per share data)
(Unaudited)
1. iBUSINESS
Diversicare
Healthcare Services, Inc. (together with its subsidiaries, “Diversicare” or the “Company”) provides long-term care services to nursing center patients in ieight states, primarily in the Southeast, Midwest, and Southwest. The Company’s centers provide a range of health care services to their patients and residents that include nursing, personal care, and social services.
Additionally, the Company’s nursing centers also offer a variety of comprehensive rehabilitation services, as well as nutritional support services. The Company's continuing operations include centers in Alabama, Indiana, Kansas, Mississippi, Missouri, Ohio, Tennessee, and Texas.
As of March 31, 2021, the Company’s continuing operations consist of i61
nursing centers with i7,250 licensed nursing beds. The Company owns i15 and leases i46
of its nursing centers. Our nursing centers range in size from i50 to i320 licensed nursing beds. The licensed nursing bed count does not include i397
licensed assisted and residential living beds.
COVID-19 Pandemic
In January 2020, the Secretary of U.S. Department of Health and Human Services (“HHS”) declared a national public health emergency due to a novel coronavirus. In March 2020, the World Health Organization categorized COVID-19, a disease caused by this coronavirus (“COVID-19”), as a pandemic. According to the Centers for Disease Control and Prevention (“CDC”), older adults and people with certain underlying medical conditions are at higher risk for serious illness from COVID-19. CDC has identified nursing home populations as being at high risk of being affected by pathogens like COVID-19 as a result of the congregate nature of nursing homes and the resident population served.
The Centers for Medicare & Medicaid Services (“CMS”) and the CDC have
issued guidance to state and local governments and long-term care facilities to help mitigate the spread of COVID-19. For example, on March 13, 2020, CMS issued a memorandum directing long-term care facilities to significantly restrict visitors and nonessential workers and to restrict communal activities, among other measures. On May 18, 2020, CMS provided “reopening” recommendations for state and local officials to determine the level of mitigation needed to prevent the transmission of COVID-19 in nursing homes, including criteria for relaxing various restrictions. On March 10, 2021, CMS updated its guidance for visitation in nursing homes to account for the availability of COVID-19 vaccines, further relaxing visitation restrictions while emphasizing the importance of maintaining infection prevention practices.
To help nursing homes and other providers respond to and contain the spread of COVID-19, CMS has also issued temporary emergency blanket waivers to various government healthcare program requirements. For example, through the end of the public health emergency declaration, CMS is waiving the requirement for a three-day hospital stay prior to Medicare Part A coverage of skilled nursing facility benefits, which allows Medicare beneficiaries that require a new or changed skilled level of care to receive that care under Medicare Part A from a skilled nursing facility without satisfying the hospital stay requirement (sometimes referred to as “skilled in place”). CMS continues to review the need for the waivers and has announced early termination of some waivers as the pandemic and nursing home practices have evolved. In addition, CMS has announced COVID-19 reporting requirements and focused infection control surveys intended to assess long-term care facility compliance
with infection control requirements in connection with the COVID-19 pandemic. CDC guidance includes infection prevention and control practices intended to protect both nursing home residents and healthcare personnel.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes, among other things, modifications to the limitation on business interest expense and net operating loss provisions relative to the payment of Federal income taxes and allows an optional payment deferral of the employer's portion of Social Security taxes that were otherwise due through December 31, 2020. These provisions of the CARES Act were effective after the date of enactment and also include the appropriation of stimulus funds to Medicare and Medicaid providers. The Paycheck
Protection Program and Health Care Enhancement Act ("PPPHCE Act"), enacted on April 24, 2020, the Consolidated Appropriations Act, 2021 ("CAA"), enacted December 27, 2020, and American Rescue Plan Act of 2021 ("ARPA"), enacted on March 11, 2021, provide for additional emergency appropriations for COVID-19 response.
Together, the CARES Act and other enacted legislation, authorize funding to healthcare entities to be distributed through the Public Health and Social Services Emergency Fund ("PHSSEF"), also known as the Provider Relief Fund. Payments from PHSSEF, as made to providers through general and targeted distributions, are intended to compensate providers for lost revenues and healthcare-related expenses attributable to the COVID-19 pandemic only.
As long as the recipient has sufficient COVID-19 attributable expenses and lost revenues, as defined by the PHSSEF, between January 1, 2020 and June 30, 2021 and complies with certain terms and conditions, these payments are not required to be repaid. The terms and conditions include, among others, requirements to comply with certain reporting requirements, limitations on balance billing and restrictions
9
against using PHSSEF funds to reimburse expenses or losses that have been reimbursed from other sources or that other sources are obligated to reimburse. The CAA provides that targeted distribution payments made to an eligible entity may be allocated by the entity's parent
organization among its subsidiary eligible health care providers and the entity receiving the targeted distribution payments remains responsible for reporting obligations. The Company is utilizing the funds it received from the PHSSEF to compensate for COVID-19 attributable lost revenues and pay for permissible expenses, including but are not limited to increased wages and increased costs for personal protective equipment, infection control supplies, and COVID-19 testing.
Additionally, the CARES Act and other enacted legislation authorized additional relief funding to skilled nursing facilities and nursing homes in the form of Nursing Home Infection Control distributions, with a fixed $10,000 distributed for each facility and variable distributions based on number of beds. The legislation also provides for infection control quality incentive
payments to skilled nursing facilities and nursing homes based on certain performance measures tied to COVID-19 infections and mortalities. These payments were calculated based on monthly performance periods running from September through December 2020, with the total available bonus payment for each performance period determined in part based on data reported via Certification and Survey Provider Enhanced Reports ("CASPER"). The terms and conditions for this distribution limit use of payments to certain infection control expenses. HHS has not yet published reporting requirements for these distributions and has not yet stipulated a time period by which these funds must be used.
The Company is still evaluating the most recent guidance for amounts distributed under the CARES Act and other enacted legislation; however, the
Company currently anticipates, but cannot guarantee, that it will have sufficient COVID-19 attributable expenses and lost revenues to retain the PPSSEF payments it has received to date. The Company will not be able to determine the amount of used funds until the form, process and reporting rules are finalized by the federal government, and the Company knows the full extent of its COVID-19 attributable expenses and lost revenues. There also can be no assurance that the PHSSEF funds will ultimately be enough to reimburse the Company for the full extent of its COVID-19 attributable expenses and losses.
As a result of the COVID-19 pandemic, we have experienced and may continue
to experience price increases in equipment, pharmaceuticals, and medical supplies due to increased demand and limited availability for certain items. Staffing, equipment, pharmaceutical and medical supplies and vaccine shortages may impact our ability to admit and treat patients. We have incurred, and may continue to incur, increased expenses arising from the COVID-19 pandemic, particularly in the form of increased labor costs, testing and the increased costs of personal protective equipment, food and infection control supplies. The Company expects such increased expenses to continue and likely increase further into 2021. Refer to Note 4 "COVID-19 Pandemic" for further information.
Since the end of calendar year 2020, there have been additional cases of COVID-19 at certain of our centers. We have experienced and may continue to experience
reduced occupancy in our centers, in part due to perceived risks by patients and family members of residential care and their perception of restrictions such as limited visitation policies (which have been relaxed pursuant to CMS guidance), a reduction in patients released to nursing homes from hospitals and other healthcare facilities, and a general reluctance to seek medical care or interface with the healthcare system during the pandemic or for an undetermined period of time. Occupancy may also be affected by the data each nursing home is required to report, including the number of confirmed and suspected cases of COVID-19 and resident deaths related to COVID-19, which is made publicly available through the CDC National Healthcare Safety Network.
2. iCONSOLIDATION
AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
i
The interim consolidated financial statements for the three month periods ended March 31, 2021 and 2020, included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. In the opinion of management of the Company, the accompanying interim consolidated financial statements reflect all normal, recurring adjustments necessary to present fairly the Company’s financial position at March 31, 2021, the results of operations, changes in shareholders' deficit and cash flows for the three month period ended March 31, 2021 and 2020. The
Company’s balance sheet information at December 31, 2020, was derived from its audited consolidated financial statements as of December 31, 2020.
The results of operations for the periods ended March 31, 2021 and 2020 are not necessarily indicative of the operating results that may be expected for a full year. These interim consolidated financial statements should be read in connection with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
10
PHSSEF
Funds
During the year ended December 31, 2020, the Company implemented certain changes to its accounting policies related to the recognition of stimulus funds through the PHSSEF, which it has applied consistently throughout the period ended March 31, 2021. There is no U.S. GAAP that explicitly covers accounting for government "grants" to for-profit entities with the exception of certain agricultural subsidies. In the absence of authoritative U.S. GAAP guidance, the Company considered the application of other authoritative accounting guidance by analogy and concluded that the guidance outlined in International Accounting Standards 20 - Accounting
for Government Grants and Disclosures of Government Assistance ("IAS 20") was the most appropriate analogy for the purpose of recording and classifying the federal and certain state stimulus funds received by the Company. Under IAS 20, once it is reasonably assured that the entity will comply with the conditions of the grant, the grant money should be recognized on a systematic basis over the periods in which the entity recognizes the related expenses or losses for which the grant money is intended to compensate. The Company recognizes grants once both of the following conditions are met: (1) the Company is eligible to receive the grant, and (2) the
Company is able to comply with the relevant conditions of the grant. Federal and certain state stimulus funds that are recognized to offset healthcare related expenses and lost revenue attributable to COVID-19 are reflected as "other operating income" on the accompanying interim consolidated statement of operations. Federal stimulus funds received and used toward capital improvements that assist with the response to and prevention and spread of COVID-19 is accounted for as a capital grant. For such an asset acquired with the use of a stimulus funds, the Company will recognize the asset as a net zero asset. Refer to Note 4, "COVID-19 Pandemic" to the interim consolidated financial statements included in this report for additional information.
Additionally, the
Company has received Medicaid stimulus funds, which are recognized in accordance with ASC 606. Refer to Note 5, "Revenue Recognition and Accounts Receivable" to the interim consolidated financial statements included in this report for additional information.
3. RECENT ACCOUNTING GUIDANCE
ii
Accounting
Standards Recently Issued But Not Yet Adopted by the Company
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance intends to improve financial reporting by requiring timelier recognition of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. This update requires that financial statement assets measured at an amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. This standard is effective for smaller reporting companies
for the fiscal year beginning after December 15, 2022 with early adoption permitted. The Company is in the initial stages of evaluating the impact from the adoption of this new standard on the consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The new guidance contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU No. 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the
Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The amendments in the ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The Company continues to evaluate changes in the market and may apply other elections, as applicable, in the future as allowed under ASU No. 2020-04.
/
4. iCOVID-19
PANDEMIC
As of March 31, 2021, the Company has received $i51,607 from the PHSSEF. The Company recognized $i10,534
as income, which is reflected in "other operating income" in the Company's results of operations for the three month period ended March 31, 2021. For the three months ended March 31, 2021, the Company utilized $i305 of these stimulus dollars to fund capital improvements to prevent the spread of COVID-19. The
remaining stimulus funds of $i19,505 as of March 31, 2021 are classified as "deferred income" on the interim consolidated balance sheet, which also includes Nursing Home Infection Control Distributions. The Nursing Home Infection Control Distributions, which also include infection control quality incentive payments, are subject to terms and conditions that require recipients to use the funds for infection control expenses. HHS has not yet published
reporting requirements for these distributions and has not yet stipulated a time period by which these funds must be used. The Company recognized $i787 of grant funds from states, which is included in "other operating income" in the Company's results of operations for the three month period ended March 31,
2021. Additionally, the Families First Coronavirus Response Act provided states with a temporary increase in the regular federal matching rate, or federal medical assistance percentage, used to determine the federal government's share of the cost of covered services in state Medicaid programs, provided the states agreed to certain conditions such as not imposing cost-sharing requirements for COVID-19-related testing
11
and treatment. The Company recognized $i4,056
for the three month period ended March 31, 2021 of Medicaid and Hospice dollars related to this temporary increase in the federal matching rate, which related to patient services rendered and is reflected in "patient revenues, net" in the Company's results of operations for the three month period ended March 31, 2021.
The Company initially elected to participate in the payment deferral of the employer's portion of Social Security taxes. During the third quarter of 2020, the Company ceased the deferral election and paid $i3,185.
As of March 31, 2021, the Company has no remaining liability related to the payment deferral and does not expect to participate in the payment deferral going forward.
The CARES Act and other stimulus legislation also include other provisions offering financial relief, for example lifting the Medicare sequestration from May 1, 2020 through December 31, 2021, which would have otherwise reduced payments to Medicare providers by 2% as required by the Budget Control Act of 2011 (but also extending sequestration through 2030). For the three month period ended March 31, 2021, the suspension of the Medicare sequestration positively impacted net patient
revenues by $i751. However, in addition to providing funding for healthcare providers, the ARPA increases the federal budget deficit in a manner that triggers an additional statutorily mandated sequestration under the Pay-As-You-Go Act of 2010 ("PAYGO Act"). As a result, absent congressional action, Medicare spending will be reduced by up to 4 percentage points in FY 2022, in addition to the existing sequestration requirements of the Budget Control Act of 2011.
The
Company incurred an additional $i8,088 of labor expense and $i3,905
for testing and the increased costs of personal protective equipment, food and infection control supplies related to the COVID-19 pandemic for the three month period ended March 31, 2021. These expenses are reflected in "operating expense" in the Company's results of operations for the three month period ended March 31, 2021.
The Company is closely monitoring and evaluating the impact of the COVID-19 pandemic on all aspects of its business. We have identified team members and patients who have tested positive for COVID-19 at all of our centers, and we have incurred an increase in the costs of caring for the team members, patients, and residents in those
centers. The Company has also experienced reduced occupancy at its centers and has incurred additional expenditures preparing its centers for potential outbreaks and maintaining the healthcare delivery capacity of its centers. While we have experienced reduced occupancy and increased expenses, we received additional PHSSEF and other stimulus funds during 2020 and the first quarter of 2021, which have been used, and are expected to continue to be used to mitigate the impact of COVID-19 derived lost revenues associated with the reduced occupancy as well as increased expenses, and any cash flow or liquidity impacts therefrom. The Company has an interdisciplinary team monitoring and staying up to date on the latest information about COVID-19. The
Company has implemented precautionary measures and response protocols to minimize the spread of COVID-19, following guidance from CMS and the CDC. Nevertheless, the Company expects additional COVID-19 cases will occur at its centers. The Company is continuing to evaluate and consider the potential impact that COVID-19 may have on its liquidity, financial condition and results of operations due to numerous uncertainties. However, given the uncertainty as to the duration of the COVID-19 pandemic and the timing and availability of effective medical treatment and vaccines, it could have a material adverse effect on the Company's future results of operations, financial condition and liquidity.
5. iREVENUE
RECOGNITION AND ACCOUNTS RECEIVABLE
i
The Company's revenue is derived from providing quality healthcare services to its patients. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. The promise to provide quality care is accounted for as a single performance obligation satisfied at a point in time,
when those services are rendered on a daily basis.
The Company performed analyses using the application of the portfolio approach as a practical expedient to group patient contracts with similar characteristics, such that revenue for a given portfolio would not be materially different than if it were evaluated on a contract-by-contract basis. These analyses incorporated consideration of reimbursements at varying rates from Medicaid, Medicare, Managed Care, Private Pay, Assisted Living, Hospice, and Veterans for services provided in each corresponding state. It was determined
that the contracts are not materially different for the following groups: Medicaid, Medicare, Managed Care and Private Pay and other (Assisted Living, Hospice and Veterans).
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Disaggregation of Revenue and Accounts Receivable
In accordance with ASC 606, the Company recognized
$i3,757 and $i299
of Medicaid and Hospice stimulus dollars, respectively, for the three month period ended March 31, 2021 that are reflected as patient revenues in the Company's results of operations and in the table below. Refer to Note 4, "COVID-19 Pandemic" for more information. iThe following table summarizes revenue from contracts with customers by payor source
from continuing operations for the periods presented (dollar amounts in thousands):
The Company maintains a credit facility with a syndicate of banks. The Company originally entered into the credit facility in May 2013, and subsequently amended the facility. As of December 31, 2019, the credit facility consisted of a mortgage loan of $i67,500,
an acquisition loan with a borrowing capacity of $i12,500, a revolver with a borrowing capacity of $i40,250
and an affiliated revolver with a borrowing capacity of $i2,000.
On October 14, 2020, the Company executed an Amended and Restated Credit Agreement (the "Credit Agreement") with a syndicate of banks, which consists of a $i62,000
mortgage loan subsequently amended ("Amended Mortgage Loan"), a $i36,000 revolver subsequently amended ("Amended Revolver") and a $i2,000
affiliated revolver amended ("Amended Affiliated Revolver"). The Amended Mortgage Loan, Amended Revolver and Amended Affiliated Revolver have a i3-year maturity through September 30, 2023. The Amended Mortgage Loan has a term of i3 years, with principal and interest payable monthly based
on a i25-year amortization. Interest on the term loan facility is based on LIBOR plus i4.0% with a i1.0%
floor. The Amended Mortgage Loan balance was $i60,767 as of March 31, 2021 with an interest rate of i5.0%. The Amended Mortgage Loan consolidated the mortgage and
acquisition loans. The Amended Mortgage Loan is secured by i15 owned nursing centers, related equipment and a lien on the accounts receivable of these centers. The Amended Mortgage Loan, the Amended Revolver and the Amended Affiliated Revolver are cross-collateralized and cross-defaulted. The Company’s Amended Revolver and Amended Affiliated Revolver have an interest rate of LIBOR plus i4.0%
and are secured by accounts receivable and are subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions.
As of March 31, 2021 and December 31, 2020, the Company had iino/
outstanding borrowings under its revolvers. The interest rate related to the revolvers was i5.0% as of March 31, 2021. Annual fees for letters of credit issued under the Amended Revolver are i3.0%
of the amount outstanding. The Company has ifour letters of credit with a total value of $i12,387
outstanding as of March 31, 2021. Considering the balance of eligible accounts receivable, the letters of credit, the amounts outstanding under the Amended Revolver and the Amended Affiliated Revolver, and the maximum loan amount of $i24,377 for these revolvers, the balance available for borrowing under the revolvers was $i11,990
at March 31, 2021.
The Company’s debt agreements contain various financial covenants, the most restrictive of which relates to debt service coverage ratios. The Company is in compliance with all such covenants at March 31, 2021.
13
7. iDERIVATIVES
AND HEDGING ACTIVITIES
In February 2021, the Company entered into an interest rate cap agreement with a member of the bank syndicate as the counterparty. The Company entered into the interest rate cap agreement to mitigate the variable interest rate risk associated with its outstanding mortgage borrowings.
The Company designated the interest rate cap as a cash flow hedge, and the effective portion of the hedge is reflected as a component of other comprehensive income. The interest rate cap has the same maturity date as the Amended Mortgage Loan and has an amortizing notional amount that was $i60,767
as of March 31, 2021. The interest rate cap agreement requires the counterparty to pay the Company an amount equal to the applicable notional amount multiplied by the rate by which the LIBOR index exceeds a i1% strike rate during the period.
The Company assesses the effectiveness of the interest rate cap on a quarterly basis and at March 31,
2021, the Company has determined that the interest rate cap was effective. Accordingly, the gain or loss related to the change in fair value of the interest rate cap is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period during which the hedged forecasted transaction affects earnings. The fair value of the interest rate cap of $i78 at March 31, 2021 was included in other noncurrent assets
on the Company's Consolidated Balance Sheets.
In conjunction with the refinancing of its outstanding borrowings during October 2020, the Company terminated its interest rate swap and incurred a loss of $i177. Following the termination, $i90
was recorded in other comprehensive income and was reclassified as an adjustment to earnings over the remaining term of the original hedge. Of this amount, $i38 was recorded as a decrease to retained earnings for the three months ended March 31, 2021.
i
As
of March 31, 2021, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
Interest Rate Derivative
Number of Instruments
Notional
Interest Rate Cap
i1
$
i60,767
/
i
The
table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheets as of March 31, 2021 and December 31, 2020.
The
table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income for the three months ended March 31, 2021 and March 31, 2020.
Effect
of Derivative Instruments on the Consolidated Statement of Income
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
(a)
Total interest expense presented in the consolidated income statements for the three months ended March 31, 2021 and 2020 was $i1,022 and $i1,460,
respectively.
/
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8. iiLEASES/
The
Company has operating and finance leases for facilities, corporate offices, and certain equipment. The Company recognizes lease expense for these operating leases on a straight-line basis over the lease term. Leases with an initial term of one year or less are not recorded on the balance sheet. The Company's other leases have original lease terms of one to itwelve years, some of which include options to extend the lease for up to
itwenty years, and some of which include options to terminate the leases within ione year. The exercise of lease renewal options is at our sole discretion. The Company's lease agreements do not contain any material residual
value guarantees or material restrictive covenants. Upon adoption of Topic 842, the Company elected the practical expedient to not separate lease and non-lease components for all of its leases as the non-lease components are not significant to the overall lease costs.
(a)
Operating and finance lease payments exclude option to extend lease terms that are not reasonably certain of being exercised.
//
The measurement of right-of-use assets and lease liabilities requires the Company to estimate appropriate discount rates. To the extent the rate implicit in the lease is readily determinable, such rate is utilized. However, based on information available at lease commencement for the majority of our leases, the rate implicit in the lease is not known. In these instances,
the Company utilizes an incremental borrowing rate, which represents the rate of interest that it would pay to borrow on a collateralized basis over a similar term.
Cash paid for amounts included in the measurement of lease liabilities
Operating
cash flows for operating leases
$
i12,740
$
i12,673
Operating
cash flows for finance leases
i9
i9
Financing
cash flows for finance leases
i57
i52
/
9. iCOMMITMENTS
AND CONTINGENCIES
Professional Liability and Other Liability Insurance
The Company has professional liability insurance coverage for its nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a wholly-owned, offshore limited purpose insurance subsidiary, SHC Risk Carriers, Inc. (“SHC”), to replace some of the expiring commercial policies. SHC covers losses up to specified limits per occurrence. All of the Company's nursing centers
in Tennessee are now covered under the captive insurance policies along with many of the nursing centers in Alabama, Ohio and Texas, as well as those previously operated by the Company in Kentucky and Florida. The insurance coverage provided for these centers under the SHC policy provides coverage limits of at least $i1,000 per medical incident with a sublimit per center of $i3,000
and total annual aggregate policy limits of $i5,000. All other centers within the Company's portfolio are covered through
16
various commercial insurance policies which provide similar coverage limits per medical incident, per location, and on an aggregate basis
for covered centers. The deductibles for these policies are covered through the insurance subsidiary.
Reserve for Estimated Self-Insured Professional Liability Claims
Because the Company’s actual liability for existing and anticipated professional liability and general liability claims will likely exceed the Company’s limited insurance coverage, the Company has recorded total liabilities for reported and estimated future claims of $i24,824
and $i24,744 as of March 31, 2021 and December 31, 2020, respectively. This accrual includes estimates of liability for incurred but not reported claims, estimates of liability for reported but unresolved claims, actual liabilities related to settlements, including settlements to be paid over time, and estimates of legal costs related to these claims. All losses are projected on an undiscounted basis and are presented without regard to any
potential insurance recoveries. Amounts are added to the accrual for estimates of anticipated liability for claims incurred during each period, and amounts are deducted from the accrual for settlements paid on existing claims during each period.
The Company evaluates the adequacy of this liability on a quarterly basis. Semi-annually, the Company retains a third-party actuarial firm to assist in the evaluation of this reserve. Since May 2012, the actuary has assisted management in the preparation of the appropriate accrual for incurred but not reported general and professional liability claims based on data furnished as of May 31 and November 30 of each year. The actuary primarily utilizes historical data regarding the frequency and cost of the
Company’s past claims over a multi-year period, industry data and information regarding the number of occupied beds to develop its estimates of the Company’s ultimate professional liability cost for current periods.
On a quarterly basis, the Company obtains reports of asserted claims and lawsuits incurred. These reports, which are provided by the Company’s insurers and a third-party claims administrator, contain information relevant to the actual expense already incurred with each claim as well as the third-party administrator’s estimate of the anticipated total cost of the claim. This information is reviewed by the
Company quarterly and provided to the actuary semi-annually. Based on the Company’s evaluation of the actual claims information obtained, the semi-annual estimates received from the third-party actuary, the amounts paid and committed for settlements of claims and on estimates regarding the number and cost of additional claims anticipated in the future, the reserve estimate for a particular period may be revised upward or downward on a quarterly basis. Any increase in the accrual decreases results of operations in the period and any reduction in the accrual increases results of operations during the period.
As of March 31, 2021, the Company is engaged in i79
professional liability lawsuits. iTwenty-one lawsuits are currently scheduled for trial or arbitration during the next twelve months, and it is expected that additional cases will be set for trial or hearing. The Company’s cash expenditures for self-insured professional liability costs were $i1,549
and $i1,840 for the three months ended March 31, 2021 and 2020, respectively.
The Company follows the accounting guidance in ASC Topic 954 that clarifies that a health care entity should not net insurance recoveries against a related professional liability claim and that the amount of the claim
liability should be determined without consideration of insurance recoveries. Accordingly, the estimated insurance recovery receivables are included within "Self-insurance receivables" on the Consolidated Balance Sheet. As of March 31, 2021 and December 31, 2020 there are estimated insurance recovery receivables of $i1,159 and $i1,025
in "Self-insurance receivable", respectively.
Although the Company adjusts its accrual for professional and general liability claims on a quarterly basis and retains a third-party actuarial firm semi-annually to assist management in estimating the appropriate accrual, professional and general liability claims are inherently uncertain, and the liability associated with anticipated claims is very difficult to estimate. Any potential claims or settlements related to COVID-19 are uncertain at this time. Professional liability cases have a long cycle from the date of an incident to the date a case is resolved, and final determination of the Company’s actual liability for claims incurred in any given period is a process that takes years. As a result, the
Company’s actual liabilities may vary significantly from the accrual, and the amount of the accrual has and may continue to fluctuate by a material amount in any given period. Each change in the amount of this accrual will directly affect the Company’s reported earnings and financial position for the period in which the change in accrual is made.
Civil Investigative Demand ("CID")
In February 2020, we entered into a settlement agreement with the U.S. Department of Justice and the State of Tennessee of actions alleging violations of the federal False Claims Act in connection with our provision of therapy and the completion of certain resident admission forms. This settlement resolved an investigation that had begun in 2012 and covers the time period from January
1, 2010 through December 31, 2015. This agreement requires annual payments for a period of ifive years ending in February 2025 and also requires a contingent payment in the event the Company sells any of its owned facilities during the ifive-year
payment period. Relative to the settlement agreement, the Company paid $i1,000 and $i500 during the first
quarters of 2021 and 2020, respectively. As of March 31, 2021 and December 31, 2020, the Company has $i8,000 and $i9,000
outstanding related to the settlement agreement, respectively. Of the outstanding balance related to the settlement agreement, $i1,000 is reflected as "Other current liabilities" and the remaining $i7,000
and $i8,000 is reflected as "Government settlement
17
accrual" on the Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020, respectively. Failure to timely make any of these payments could result in rescission of the
settlement and result in the government having a very large claim against us, including penalties, and/or make us ineligible to participate in certain government funded healthcare programs, any of which could in turn significantly harm our business and financial condition.
In conjunction with the settlement of the government investigation related to our therapy practices, we entered into a corporate integrity agreement ("CIA") with the Office of the Inspector General of CMS. The CIA has a term of ifive years and imposes material burdens on the
Company, its officers and directors to take actions designed to ensure compliance with applicable healthcare laws, including requirements to maintain specific compliance positions within the Company, to report any non-compliance with the terms of the CIA, to return any overpayments received, to submit annual reports and for an annual audit of submitted claims by an independent review organization. The CIA sets forth penalties for non-compliance by the Company with the terms of the agreement, including possible exclusion from federally funded healthcare programs for material violations of the agreement.
Other Insurance
With respect to workers’ compensation insurance, substantially all of the
Company’s employees are covered under either a prefunded deductible policy or state-sponsored programs. The Company has been and remains a non-subscriber to the Texas workers’ compensation system and, therefore, is completely self-insured for employee injuries with respect to its Texas operations. From the period from July 1, 2008 through March 31, 2021, the Company is covered by a prefunded deductible policy. Under this prefunded policy, the Company is self-insured for the first $i500
per claim, subject to an aggregate maximum of $i3,000. The Company funds a loss fund account with the insurer to pay for claims below the deductible. The Company accounts for premium expense under this policy based on its estimate of the level of claims subject to the policy deductibles expected to be incurred. The liability for workers’ compensation claims
was $i1,115 and $i1,039 at March 31, 2021 and December 31,
2020, respectively. The Company has a non-current receivable for workers’ compensation policies covering previous years of $i2,123 and $i2,050
which is included in "other noncurrent assets" on the Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020, respectively. The non-current receivable is a function of payments paid to the Company’s insurance carrier in excess of the estimated level of claims expected to be incurred. Any potential claims or settlements related to COVID-19 are uncertain at this time.
As of March 31, 2021, the Company is self-insured for health insurance benefits for certain employees and dependents for amounts up to $i200
per individual annually. The Company provides reserves for the settlement of outstanding self-insured health claims at amounts believed to be adequate. The liability for reported claims and estimates for incurred but unreported claims was $i2,268 and $i2,358
at March 31, 2021 and December 31, 2020, respectively. The differences between actual settlements and reserves are included in expense in the period finalized. Any potential claims or settlements related to COVID-19 are uncertain at this time.
10. iSTOCK-BASED
COMPENSATION
Overview of Plans
In June 2008, the Company adopted the Advocat Inc. 2008 Stock Purchase Plan for Key Personnel (“Stock Purchase Plan”). The Stock Purchase Plan provides for the granting of rights to purchase shares of the Company's common stock to directors and officers. The Stock Purchase Plan allows participants to elect to utilize a specified portion of base salary, annual cash bonus, or director compensation to purchase restricted shares or restricted share units (“RSU's”) at i85%
of the quoted market price of a share of the Company's common stock on the date of purchase. The restriction period under the Stock Purchase Plan is generally itwo years from the date of purchase and during which the shares will have the rights to receive dividends, however, the restricted share certificates will not be delivered to the shareholder and the shares cannot be sold, assigned or disposed of during the restriction period. In June 2016, our
shareholders approved an amendment to the Stock Purchase Plan to increase the number of shares of our common stock authorized under the Plan from i150 shares to i350
shares. No grants can be made under the Stock Purchase Plan after April 25, 2028.
In April 2010, the Compensation Committee of the Board of Directors adopted the 2010 Long-Term Incentive Plan (“2010 Plan”), followed by approval by the Company's shareholders in June 2010. The 2010 Plan allows the Company to issue stock appreciation rights, stock options and other share and cash based awards. In June 2017, our shareholders approved an amendment to the 2010 Plan to increase the number of shares of our common stock authorized under the 2010 Plan from i380
shares to i680 shares. No grants can be made under the 2010 Plan after May 31, 2027.
Equity Grants and Valuations
During the three months ended March 31, 2021 and 2020, the Compensation Committee of the Board of Directors approved grants totaling approximately i106
and i198 shares of restricted common stock, respectively, to certain employees and members of the Board of Directors. The fair value of restricted shares is determined as the quoted market price of the underlying common shares at the date of the grant. The restricted shares typically vest one-third on the first, second and third anniversaries of the
18
grant
date. Unvested shares may not be sold or transferred. During the vesting period, dividends accrue on the restricted shares, but are paid in additional shares of common stock upon vesting, subject to the vesting provisions of the underlying restricted shares. The restricted shares are entitled to the same voting rights as other common shares. On March 13, 2020, the Compensation Committee of the Board of Directors approved the grant of i100
shares of common stock to the Company's Chief Executive Officer, as a one-time bonus in lieu of a 2020 salary increase and as recognition for completing the settlement with the Office of the Inspector General and the disposition of all of the Company's facilities in the State of Kentucky. The stock was fully vested on the date of the grant, and the grant date fair value of which was expensed during the quarter ended March 31, 2020.
In computing the fair value estimates for options and stock-only stock appreciation rights ("SOSARs") using the Black-Scholes-Merton valuation method, the Company took into consideration the
exercise price of the equity grants and the market price of the Company's stock on the date of grant. The Company used an expected volatility that equals the historical volatility over the most recent period equal to the expected life of the equity grants. The risk free interest rate is based on the U.S. treasury yield curve in effect at the time of grant. The Company used the expected dividend yield at the date of grant, reflecting the level of annual cash dividends currently being paid on its common stock.
Upon vesting of equity awards, all restrictions are removed. Our policy is to account for forfeitures of share-based compensation awards as they occur.
i
Summarized
activity of the equity compensation plans is presented below:
The
SOSARs and Options were valued and recorded in the same manner, and, other than amounts that may be settled pursuant to employment agreements with certain members of management, will be settled with issuance of new stock for the difference between the market price on the date of exercise and the exercise price. The Company estimated the total recognized and unrecognized compensation related to SOSARs and stock options using the Black-Scholes-Merton equity grant valuation model.
i
The
following table summarizes information regarding stock options and SOSAR grants outstanding as of March 31, 2021:
Weighted
Average
Range
of
Exercise
Grants
Grants
Exercise Prices
Prices
Outstanding
Exercisable
$i8.14
to $i10.21
$
i8.83
i45
i45
$ii5.86/
$
i5.86
i20
i20
i65
i65
/
Stock-based
compensation expense is non-cash and is included as a component of general and administrative expense or operating expense based upon the classification of cash compensation paid to the related employees. The Company recorded total stock-based compensation expense of $i95 and $i338
in the three month periods ended March 31, 2021 and 2020, respectively.
11. iINCOME TAXES
The Company recorded an income tax expense from continuing operations of $i343 during
the three months ended March 31, 2021 and a benefit of $i104 during the three months ended March 31, 2020.
When assessing the recoverability of the Company’s recorded deferred tax assets, the accounting guidance, ASC 740, Income Taxes, requires that all available positive and negative evidence be considered in evaluating
the likelihood that the Company will be able to realize the benefit of its deferred tax assets in the future, which is highly judgmental. Such evidence includes, but may not be limited to, scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax-planning strategies, and the results of recent operations.
As of March 31, 2021, the Company has a valuation allowance in the amount of $i18,609. The
Company will continue to periodically assess the realizability of its future deferred tax assets.
On March 27, 2020, the CARES Act was enacted and signed into law. Certain provisions of the CARES Act impact the 2019 income tax provision computations of the Company and were reflected in the first quarter of 2020, or the period of enactment. The CARES Act contains modifications on the depreciation of qualified improvement property, as well as the limitation of business interest for tax years beginning in 2019 and 2020. The new life classification of the qualified improvement property, allowing for bonus depreciation to be taken, along with the modification to Section 163(j) to increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable
income significantly increased the allowable deductions of the Company and result in additional taxable losses for the year-ended 2019, resulting in greater net operating losses (“NOL”) to be carried back. The NOL carryback resulted in a tax refund of $i321 and an increase to the Work Opportunity Tax Credit (“WOTC”) deferred tax asset, which is offset by a full valuation allowance. These changes pursuant to the
CARES Act did not have an impact during the three-month period ended March 31, 2021.
The Company is not currently under examination by any major income tax jurisdiction. During 2021, the statutes of limitations will lapse on the Company's 2017 Federal tax year and certain 2016 and 2017 state tax years. The Company does not believe the Federal or state statute lapses or any other event will significantly impact the balance of unrecognized tax benefits in the next twelve months. The net balance of unrecognized tax benefits was not material to the interim consolidated financial statements for the three months ended March 31,
2021 and 2020.
20
12. iEARNINGS
PER COMMON SHARE
i
Information with respect to basic and diluted net loss per common share is presented below in thousands, except per share:
The
effects of i65 and i75 SOSARs and options
outstanding were excluded from the computation of diluted earnings per common share in the three months ended March 31, 2021 and 2020, respectively, because these securities would have been anti-dilutive.
13. iBUSINESS DEVELOPMENTS AND OTHER SIGNIFICANT TRANSACTIONS
Therapy
Services
Effective November 1, 2020, the Company entered into agreements with a third party therapy company to outsource the therapy services that were previously provided by the Company through its wholly owned subsidiary Diversicare Therapy Services. The outsourced services include all physical, occupational, and speech therapy provided to patients of the Company’s facilities. The costs associated with these outsourced therapy services are included in Operating Expenses in the Company's Consolidated Statement of Operations. The contracts
are for a ithree-year term, absent termination for cause by either party.
2020 Lease Amendment
On December 1, 2020, the Company entered into an agreement with Omega to transfer operations of a facility located in Florida to another operator. The agreement effectively amended the Omega Master Lease to remove this center, reduce the annual rent expense, and release the
Company from any further obligations arising under the Omega Master Lease with respect to the Florida facility. The remaining Lease terms remain unchanged with an initial term of itwelve years and itwo
optional i10-year extensions. The annual lease fixed escalator remains at i2.15%.
21
ITEM
2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Diversicare Healthcare Services, Inc. (together with its subsidiaries, “Diversicare” or the “Company”) provides long-term care services to nursing center patients in eight states, primarily in the Southeast, Midwest, and Southwest. The Company’s centers provide a range of health care services to their patients and residents that include nursing, personal care, and social services. Additionally, the Company’s
nursing centers also offer a variety of comprehensive rehabilitation services, as well as nutritional support services. The Company's continuing operations include centers in Alabama, Indiana, Kansas, Mississippi, Missouri, Ohio, Tennessee, and Texas. The Company's operating results also include the results of discontinued operations in the state of Kentucky that have been reclassified on the face of the financial statements to reflect the discontinued status of these operations for all periods presented.
As of March 31, 2021, the Company’s continuing operations consist of 61 nursing centers with 7,250 licensed nursing beds.
The Company owns 15 and leases 46 of its nursing centers. Our nursing centers range in size from 50 to 320 licensed nursing beds. The licensed nursing bed count does not include 397 licensed assisted living and residential beds.
Key Performance Metrics
Skilled Mix. Skilled mix represents the number of days our Medicare or Managed Care patients are receiving services at the skilled nursing facilities divided by the total number of days (less days from assisted living patients).
Average rate per day. Average rate per day is the revenue by payor source for a period at the skilled nursing facility divided by actual patient days for the revenue source for a given period.
Average
daily skilled nursing census. Average daily skilled nursing census is the average number of patients who are receiving skilled nursing care.
COVID-19 and Federal Relief Legislation
As a result of the COVID-19 pandemic, federal and state governments have passed legislation, promulgated regulations, and taken other administrative actions intended to assist healthcare providers in providing care to COVID-19 and other patients during the public health emergency and to address public health needs. These measures include temporary relaxation of conditions of participation for healthcare providers, relaxation of licensure requirements for healthcare professionals, relaxation of privacy restrictions for telehealth remote communications, promoting use of telehealth by expanding the scope of services for which reimbursement is available, relaxation of certain Medicare
reimbursement rules, such as requirement for a three-day hospital stay prior to Medicare Part A coverage of skilled nursing facility benefits, and limited waivers of fraud and abuse laws for activities related to COVID-19 during the public health emergency period. They also include requirements for skilled nursing centers to report to public health authorities, residents and their representatives when residents, and staff are confirmed as having or are being investigated for having COVID-19.
We are working with federal, state, and local health authorities to respond to the COVID-19 pandemic and are taking measures to try to limit the spread of the virus. For example, we have implemented screening protocols for staff, residents, and visitors. CMS requires nursing homes in states with positive testing rates above a certain threshold to test all staff on a weekly basis. Although we are implementing considerable safety measures,
caring for COVID-19 patients has associated risks. In addition, we have experienced, and may continue to experience, price increases in equipment, pharmaceuticals, and medical supplies due to increased demand and limited availability for certain items. Staffing, equipment, pharmaceutical and medical supplies and vaccine shortages may impact our ability to admit and treat patients. We have incurred, and may continue to incur, increased expenses arising from the COVID-19 pandemic, particularly in the form of increased labor costs, testing and the increased costs of personal protective equipment, food and infection control supplies. The Company expects such increased expenses to continue and likely increase further into 2021.
Since the end of calendar year 2020, there have been additional cases of COVID-19 at certain of our centers. We have experienced
reduced occupancy in our centers, in part due to perceived risks by patients and family members of residential care and their perception of restrictions such as limited visitation policies (which have been relaxed pursuant to CMS guidance), a reduction in patients released to nursing homes from hospitals and other healthcare facilities, and a general reluctance to seek medical care or interface with the healthcare system during the pandemic or for an undetermined period of time. Occupancy may also be affected by the data each nursing home is required to report, including the number of confirmed and suspected cases of COVID-19 and resident deaths related to COVID-19, which is made publicly available through the CDC National Healthcare Safety Network.
The Company is closely monitoring and evaluating the impact of the COVID-19 pandemic on all
aspects of its business. We have identified team members and patients who have tested positive for COVID-19 at our centers, and we have incurred increases in the costs of caring for the patients and residents in those centers. The Company incurred an additional $8.1 million of labor expense and $3.9 million for testing and the increased costs of personal protective equipment, food and infection
22
control supplies related to the COVID-19 pandemic for the three month period ended March 31, 2021. The Company has also experienced reduced occupancy at its centers
and has incurred additional expenditures preparing our centers for potential outbreaks. The Company has an interdisciplinary team monitoring and keeping apprised of the latest information about the virus and its prevalence. The Company has implemented precautionary measures and response protocols to minimize the spread of the virus, following guidance from the CDC, but the Company nevertheless expects additional cases of the virus will occur at these and other facilities.
The CARES Act, the PPPHCE Act, the CAA and the ARPA offer various forms of financial relief for healthcare providers, including, among other things, modifications to the limitation on business interest expense
and net operating loss provisions relative to the payment of federal income taxes. In addition, these stimulus laws include over $178 billion of funding to be distributed through the PHSSEF to eligible providers, including public entities and Medicare and/or Medicaid enrolled providers. It is not clear how much of the funding remains available for distribution. PHSSEF payments are intended to assist healthcare providers with lost revenues and healthcare-related expenses incurred in response to the COVID-19 pandemic. As long as the recipient has sufficient COVID-19 attributable expenses and lost revenues between January 1, 2020 and June 30, 2021 and complies with certain terms and conditions, the PHSSEF payments are not required to be repaid. The terms and conditions include, among other things, complying with reporting requirements, limitations on balance billing and restrictions
against using PHSSEF funds to reimburse expenses or losses that other sources are obligated to reimburse.
Additionally, the CARES Act and other enacted legislation authorized additional relief funding to skilled nursing facilities and nursing homes in the form of Nursing Home Infection Control distributions, with a fixed ten thousand dollars distributed for each facility and variable distributions based on number of beds. The legislation also provides for infection control quality incentive payments to skilled nursing facilities and nursing homes based on certain performance measures tied to COVID-19 infections and mortalities. These payments were calculated based on monthly performance periods running from September through December 2020, with the total available bonus payment for each performance period determined in part based on data reported via CASPER. The terms and conditions for this distribution limit use of payments
to certain infection control expenses. HHS has not yet published reporting requirements for these distributions and has not yet stipulated a time period by which these funds must be used.
As of March 31, 2021, we received $51.6 million from the PHSSEF. We also applied for additional Phase 3 General Distribution PHSSEF payments; however, we have not received any payments as of March 31, 2021.
Recipients of more than ten thousand dollars in PHSSEF funds will be required to submit reports to HHS that include information about their expenses and lost revenues and use of the PHSSEF funds. Although registration for reporting is available, HHS has not yet opened the portal for reporting or finalized a deadline for submission of the initial report. HHS continues to update guidance regarding
post-payment reporting requirements that provide some additional details and examples related to how recipients should calculate their COVID-19 attributable expenses and lost revenues for purposes of PHSSEF reporting. Ultimately, to the extent that reports submitted by a recipient do not demonstrate sufficient healthcare related lost revenues and expenses attributable to COVID-19 (as those terms are defined by HHS), the recipient may have to repay any excess funds received.
Due to the recent enactment of the CARES Act and other stimulus legislation and evolving guidance, there is still a high degree of uncertainty surrounding the PHSSEF funds. We are closely tracking our use of the funds received from PHSSEF in order to demonstrate compliance with the terms and conditions, including applicable reporting requirements. The Company is still evaluating
the most recent guidance related to these funds; however, the Company currently anticipates, but cannot guarantee, that it will have sufficient COVID-19 attributable expenses and lost revenues to retain the PHSSEF payments it has received to date. The Company will not be able to determine the amount of used funds until the reporting rules are finalized by the federal government, and the Company knows the full extent of its COVID-19 attributable expenses and lost revenues. The Company can offer no assurance that it will be in compliance with all requirements related to retaining the PHSSEF payments. If we fail to appropriately comply
with all of the terms and conditions or do not have sufficient expenses and lost revenues (as defined by these programs), the Company may be required to repay some or all of these amounts, which could have a material adverse impact.
The CARES Act and related legislation also make available or expanded other forms of financial assistance for healthcare providers. For example, the CARES Act provides for 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. CMS is no longer accepting applications for accelerated or advanced payments. The Company did not elect to participate in this program. In addition,
the CARES Act and related legislation suspend the Medicare sequestration from May 1, 2020 through December 31, 2021, which would have otherwise reduced payments to Medicare providers by 2%, as required by the Budget Control Act of 2011, but also extended sequestration through 2030. The ARPA increases the federal budget deficit in a manner that triggers an additional statutorily mandated sequestration under the PAYGO Act. As a result, absent congressional action, Medicare spending will be reduced by up to 4 percentage points in FY 2022, in addition to the existing sequestration requirements of the Budget Control Act of 2011.
23
The
Company is continuing to evaluate and consider the potential impact that the COVID-19 public health emergency may have on its liquidity, financial condition and results of operations due to numerous uncertainties. We also continue to assess the potential impact of the CARES Act, other enacted legislation, and other stimulus measures, if any, as well as the impact of other laws, regulations, and guidance related to COVID-19 on our business, results of operations, financial condition and cash flows. Given the uncertainty as to the duration and severity of the COVID-19 pandemic, it could have a material adverse effect on the Company's future results of operations, financial condition and liquidity.
Strategic Operating Initiatives
We
identified several key strategic objectives to increase shareholder value through improved operations and business development. These strategic operating initiatives include: improving our facilities' quality metrics, improving skilled mix in our nursing centers, improving our average Medicare rate, implementing and maintaining Electronic Medical Records (“EMR”) to improve Medicaid capture, and completing strategic acquisitions and divestitures. We have experienced success in these initiatives and expect to continue to build on these improvements.
Improving skilled mix and average Medicare rate:
One of our key performance indicators is skilled mix. Our strategic operating initiatives of improving our skilled mix and our average Medicare rate required investing in nursing and clinical care to treat more acute patients along with nursing center-based marketing representatives
to attract these patients. These initiatives developed referral and Managed Care relationships that have attracted and are expected to continue to attract payor sources for patients covered by Medicare and Managed Care. The Company's skilled mix for the three months ended March 31, 2021 and 2020 was 18.9% and 13.7%, respectively. The increase in skilled mix is due in part to the impact of COVID-19 on our patients and residents and the related skilled in place wiaver issued by CMS relative to the pandemic. For the past several years, census and skilled mix trends have been affected by healthcare reforms resulting in lower lengths of stay among our skilled patient population and lower admissions caused by initiatives among acute care providers, managed care payors and conveners to divert
certain skilled nursing referrals to home health or other community-based care settings.
Utilizing Electronic Medical Records to improve Medicaid acuity capture:
As another part of our strategic operating initiatives, all of our nursing centers utilize EMR to improve Medicaid acuity capture, primarily in our states where the Medicaid payments are acuity based. By using EMR, we have increased our average Medicaid rate in certain acuity based states by accurate and timely capture of care delivery.
Completing strategic transactions and other business developments:
Our strategic operating initiatives include a focus on completing strategic acquisitions and divestitures. We continue to pursue and investigate opportunities to acquire or lease new centers, focusing primarily on opportunities within
our existing geographic areas of operation. As part of our strategic efforts, we routinely perform thorough analyses on our existing centers in order to determine whether continuing operations within certain markets or regions is in line with the short-term and long-term strategy of the business. Additionally, we have expanded our participation in certain state sponsored quality incentive programs that reward providers for achievement of certain quality measures.
On December 1, 2020, the Company entered into an agreement with Omega Healthcare Investors ("Omega") to transfer operations of the facility located in Florida to another operator. The agreement effectively amended the Master Lease Agreement between the
Company and Omega, dated October 1, 2018 (the "Omega Master Lease") to remove this center, reduced annual rent expense, and released the Company from further obligations arising under the Omega Master Lease with respect to the Florida facility.
Effective November 1, 2020, the Company entered into agreements with a third party therapy company to outsource the therapy services that have been provided by the Company through its wholly owned subsidiary Diversicare Therapy Services. The outsourced services include all physical, occupational, and speech therapy provided
to patients of the Company’s facilities. The contracts are for a three year term, absent termination for cause by either party. The third party provider has extensive expertise in providing therapy, and the Company believes that the therapy company’s expertise in this area will benefit our patients and result in an overall operational cost savings for the Company.
During 2019, the Company expanded its participation in the Texas Quality Incentive Program ("QIPP") as administered by the Texas Health
and Human Services Commission. QIPP provides supplemental Medicaid payments for skilled nursing centers that achieve certain quality measures. The Company previously had one of its Texas skilled nursing centers participating in the QIPP. During April 2019, the Company enrolled an additional eleven of its Texas skilled nursing centers in the program, such that twelve of the Company’s centers participate in the QIPP effective September 1, 2019. To allow four of these centers to meet the QIPP participation requirements, the Company entered into a transaction with a Texas medical district
already participating in the QIPP, providing for the transfer of the related provider licenses from the Company to the medical district. The Company’s operating subsidiary retained the management of the centers on behalf of the medical district. In response to the
24
COVID-19 pandemic, the Texas Health and Human Services Commission waived some of the performance and reporting requirements for QIPP effective March 1, 2020 through the remainder of the state fiscal year 2021.
Basis of Financial Statements
Our patient revenues consist of the fees charged for the care of patients in the nursing centers we own and lease. Our other operating income consists of Medicare stimulus funds recognized. Our operating expenses include the costs, other than lease, professional liability, depreciation and amortization expenses, incurred in the operation of the nursing centers we own and lease. Our general and administrative expenses consist of the costs of the corporate office and regional support functions. Our interest, depreciation and amortization expenses include all such expenses across the range of our operations.
Critical Accounting Policies and Judgments
A “critical accounting policy” is one which is both important to
the understanding of our financial condition and results of operations and requires management’s most difficult, subjective or complex judgments often involving estimates of the effect of matters that are inherently uncertain. Actual results could differ from those estimates and cause our reported net income or loss to vary significantly from period to period. Our critical accounting policies are more fully described in our 2020 Annual Report on Form 10-K.
Revenue Sources
We classify our revenues from patients and residents into four major categories: Medicaid, Medicare, Managed Care, and Private Pay and other. Medicaid revenues are composed of the traditional Medicaid and Managed Medicaid programs established to provide benefits to those in need of financial assistance
in the securing of medical services. Medicare revenues include revenues received under both Part A and Part B of the Medicare program. Managed Care revenues include payments for patients who are insured by a third-party entity, typically called a Health Maintenance Organization, often referred to as an HMO plan, or are Medicare beneficiaries who assign their Medicare benefits to a Managed Care replacement plan often referred to as Medicare replacement products. The Private Pay and other revenues are composed primarily of individuals or parties who directly pay for their services. Included in the Private Pay and other payors are patients who are hospice beneficiaries as well as the recipients of Veterans Administration benefits. Veterans Administration payments are made pursuant to renewable contracts negotiated with these payors.
The
Company recognized $3.8 million and $0.3 million of Medicaid and Hospice stimulus dollars, respectively, for the three month period ended March 31, 2021 that are reflected as patient revenues from Medicaid and Private Pay and Other, respectively, in the Company's results of operations. Refer to Note 4, "COVID-19 Pandemic" to the interim consolidated financial statements included in this report for more information. The following table summarizes revenue from contracts with customers by payor source from continuing operations for the periods presented (dollar amounts in thousands).
Consistent
with the nursing home industry in general, changes in the mix of a facility’s patient population among Medicaid, Medicare, Managed Care, and Private Pay and other can significantly affect the profitability of the facility’s operations.
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Health Care Industry
The health care industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, quality of patient care and Medicare and
Medicaid fraud and abuse. Over the last several years, government activity has increased with respect to investigations and allegations concerning possible violations by health care providers of a number of statutes and regulations, including those regulating fraud and abuse, false claims, patient privacy and quality of care issues. Violations of these laws and regulations could result in exclusion from government health care programs, significant fines and penalties, as well as significant repayments for patient services previously billed. Compliance with such laws and regulations is subject to ongoing government review and interpretation. The Company is involved in regulatory actions of this type from time to time.
In recent years, the U.S. Congress and some state legislatures have considered and enacted significant reforms affecting the
availability, payment and reimbursement of healthcare services in the United States. Reforms that we believe may have a material impact on the long-term care industry and on our business include, among others, possible modifications to the conditions of qualification for payment, bundling of payments to cover both acute and post-acute care and the imposition of enrollment limitations on new providers. The most prominent of the federal legislative reform efforts, the Affordable Care Act, affects how health care services are covered, delivered and reimbursed. The Affordable Care Act expands coverage through a combination of public program expansion and private sector reforms, provides for reduced growth in Medicare program spending, and promotes initiatives that tie reimbursement to quality and care coordination. Some of the provisions, such as the requirement that large employers provide health insurance benefits to full-time employees, have increased our operating expenses.
The Affordable Care Act expands the role of home-based and community services, which may place downward pressure on our sustaining population of Medicaid patients. However, there is considerable uncertainty regarding the future of the Affordable Care Act. The law has been subject to legislative and regulatory changes and court challenges, and although the current presidential administration has indicated its intent to protect the Affordable Care Act, it is possible that there may be continued changes to the law, its implementation or its interpretation. For example, effective January 1, 2019, Congress eliminated the financial penalty associated with the individual mandate. As a result of this change, a federal judge in Texas ruled in December 2018 that the individual mandate was unconstitutional and determined that the rest of the Affordable Care Act was, therefore, invalid. In December 2019, the Fifth Circuit Court of
Appeals upheld this decision with respect to the individual mandate, but remanded for further consideration of how this affects the rest of the law. In November 2020, the U.S. Supreme Court heard oral arguments regarding this case, and the law remains in place pending a decision.
Skilled nursing centers are required to bill Medicare on a consolidated basis for certain items and services that they furnish to patients, regardless of the cost to deliver these services. This consolidated billing requirement essentially makes the skilled nursing center responsible for billing Medicare for all care services delivered to the patient during the length of stay. CMS has instituted a number of test programs designed to extend the reimbursement and financial responsibilities under consolidating billing beyond the traditional discharge date to include a broader set of bundled services. Such examples may include, but are not exclusive to,
home health, durable medical equipment, home and community based services, and the cost of re-hospitalizations during a specified bundled period. Currently, these test programs for bundled reimbursement are confined to a small set of clinical conditions, but CMS has indicated that it is developing additional bundled payment models. This bundled form of reimbursement could be extended to a broader range of diagnosis related conditions in the future. The potential impact on skilled nursing center utilization and reimbursement is currently unknown. The process for defining bundled services has not been fully determined by CMS and is therefore subject to change during the rulemaking process. CMS has indicated that it is working toward a unified payment system for post-acute care services, including those provided by skilled nursing centers.
On August 7, 2019,
CMS issued a final rule outlining Medicare payment rates for skilled nursing facilities that became effective October 1, 2019. CMS projects that aggregate payments to skilled nursing facilities will increase by 2.4%, reflecting a skilled nursing facility market basket percentage update of 2.8% with a 0.4 percentage point reduction for the multifactor productivity adjustment. In addition, the Patient-Driven Payment Model ("PDPM") took effect October 1, 2019. The PDPM is a payment system for patients in a covered Medicare Part A skilled nursing facility stay that replaces the Resource Utilization Group ("RUG-IV") model, which primarily used volume of services as the basis for payment classification. The PDPM model instead classifies patients into payment groups based on specific patient characteristics and shifts the focus away from paying for the volume of
services provided. CMS will use a budget neutrality factor to satisfy the requirement that PDPM be budget neutral relative to RUG-IV. CMS stated that it intends for the new model not to change the aggregate amount of Medicare payments to skilled nursing facilities, but to more accurately reflect resource utilization.
On July 31, 2020, CMS issued a final rule outlining Medicare payment rates for skilled nursing facilities for federal fiscal year 2021. Effective October 1, 2020, payments to skilled nursing facilities are estimated to increase by 2.2% based on a market basket percentage update of 2.2%, adjusted by a 0.0 percentage point multifactor productivity adjustment.
CMS publishes nursing home rankings based on performance scores on the Care Compare website,
which is intended to assist the public in finding and comparing providers. The Care Compare website publishes for each nursing home a rating between 1
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and 5 stars as part of CMS’s Five-Star Quality Rating System. An overall star rating is determined based on three components (information from the last three years of health inspections, staffing information, and quality measures), each of which also has its own five-star rating. The ratings are based, in part, on the quality data nursing centers are required to report. For example, nursing centers must report the rate of short-stay residents who are successfully discharged into the community and the percentage
who had an outpatient emergency department visit. As a result of the COVID-19 pandemic, CMS issued temporary waivers and flexibilities that impact the information posted on the Care Compare website and used in the Five-Star Quality Rating System. For example, CMS temporarily waived the requirement to submit staffing data and issued guidance prioritizing or suspending certain nursing home surveys. Some of these measures have been lifted, while some are subject to phased re-opening criteria. However, due to these changes and their impact on data, CMS is adjusting some ratings (e.g., by holding specific quality measures constant). In addition to the standard Care Compare data, CMS is posting COVID-19 data submitted by nursing homes on the CDC National Healthcare Safety Network and linking to this information from the Care Compare website.
The information posted includes the reported number of confirmed and suspected cases of COVID-19 in each facility, resident deaths related to COVID-19, availability of personal protective equipment and COVID-19 testing, and potential staffing shortages.
We remain diligent in continuing to provide outstanding patient care to achieve high rankings for our centers, as well as assuring that our rankings are correct and appropriately reflect our quality results. Our focus has been and continues to be on the delivery of quality care to our patients and residents.
Contractual Obligations and Commercial Commitments
We have certain contractual obligations of continuing operations as of March 31,
2021, summarized by the period in which payment is due, as follows (dollar amounts in thousands):
Contractual Obligations
Total
Less than 1 year
1 to 3 Years
3 to 5 Years
After 5
Years
Long-term debt obligations (1)
$
69,125
$
5,052
$
64,064
$
9
$
—
Settlement obligations (2)
3,518
3,518
—
—
—
Settlement
of civil investigative demand (3)
8,529
1,180
4,281
3,068
—
Operating leases (4)
392,547
51,408
105,653
107,308
128,178
Required
capital expenditures under operating leases (5)
14,788
1,935
3,869
3,869
5,115
Total
$
488,507
$
63,093
$
177,867
$
114,254
$
133,293
(1)Long-term
debt obligations include scheduled future payments of principal and interest of long-term debt and amounts outstanding on our finance lease obligations. Our long-term debt obligations decreased $1.2 million between December 31, 2020 and March 31, 2021. See Note 6, "Long-Term Debt" to the interim consolidated financial statements included in this report for additional information.
(2)Settlement obligations relate to professional liability cases that are expected to be paid. The professional liabilities are included in our self-insurance reserves.
(3)Settlement of civil investigative demand relates to our settlement agreement, including interest, with the U.S. Department of Justice and the State of Tennessee. See additional description
of our contingencies in Note 8 "Commitments and Contingencies" to the interim consolidated financial statements and "Item 1. Legal Proceedings."
(4)Represents minimum annual undiscounted lease payments (exclusive of taxes, insurance, and maintenance costs) under our operating lease agreements, which does not include renewals. Our operating lease obligations decreased $12.7 million between December 31, 2020 and March 31, 2021. See Note 8, "Leases," to the interim consolidated financial statements included in this report for additional information.
(5)Includes annual expenditure requirements under operating leases. Our required capital expenditures decreased $0.8 million between December 31,
2020 and March 31, 2021.
Employment Agreements
We have employment agreements with certain members of management that provide for the payment to these members of amounts up to two times their annual salary in the event of a termination without cause, a constructive discharge (as defined therein), or upon a change of control of the Company (as defined therein). The maximum contingent liability under these agreements is approximately $1.6 million as of March 31, 2021. The terms of such agreements are for one year and automatically renew for one year if not terminated by us or the employee.
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Results
of Continuing Operations
The following tables present the unaudited interim consolidated statements of operations and related data for the three month period ended March 31, 2021 and 2020:
Patient revenues were $113.4 million and $120.0 millionfor the three months ended March 31, 2021 and 2020, respectively, a decrease of $6.6 million.
Our same store Medicaid, Medicare and Managed Care rates for the first quarter of 2021 increased 0.3%, 3.2% and 6.2%, respectively, resulting in a revenue increase of $0.4 million, $0.2 million and $0.7 million, respectively. Our Medicare and Managed care census for the first quarter of 2021 increased 23.0% and 11.3%, respectively, due in part to the impact
of COVID-19 on our patients and residents and related skilled in place waiver issued by CMS relative to the pandemic, resulting in increased revenue of $5.1 million and $1.1 million, respectively. Conversely, our Medicaid, Private and Hospice average daily census for the first quarter of 2021 decreased 16.9%, 22.7% and 25.1%, respectively, resulting in reduced revenue of $10.7 million, $1.8 million and $2.3 million, respectively. The decline in census for the first quarter of 2021 was mainly due to the impact of the COVID-19 pandemic. We recognized Medicaid and Hospice state stimulus funds of $3.8 million and $0.3 million, respectively, during the first quarter of 2021. Additionally, the suspension of sequestration resulted in an increase in revenue of $0.8 million. for the first quarter of 2021. The QIPP and Intergovernmental Transfer ("IGT") programs resulted in $0.6 million of additional revenues for the first quarter of 2021. One less day of revenues for the
first quarter of 2021 compared to the first quarter of 2020 resulted in $1.2 million less revenue.
The following table summarizes key revenue and census statistics for continuing operations for each period:
*Excludes COVID-19 federal and state stimulus payments
Other Operating Income
Since January 1, 2020, we
have received $51.6 million of provider relief from the CARES Act, PPHCE Act, and the Families First Coronavirus Response Act. We recognized $10.5 million of the funds during the first quarter of 2021, which is classified as "Other Operating Income" in the Company's results of operations. We also recognized $0.8 million of grant funds from states, which is included in "Other Operating Income" in the Company's results of operation for the three months ended March 31, 2021. The Medicare stimulus funds that we recognized during the quarter were used to offset healthcare-related expenses and lost revenues attributable to COVID-19. Increased healthcare related expenses included but were not limited to increased wages and increased costs for personal
protective equipment, testing and other supplies. Refer to Note 4, "COVID-19 Pandemic" to the interim consolidated financial statements.
Operating Expense
Operating expense increased in the first quarter of 2021 to $96.8 million from $94.9 million in the first quarter of 2020, an increase of $1.9 million. Operating expense increased as a percentage of patient revenues to 85.4% for the first quarter of 2021 as compared to 79.1% for the first quarter of 2020.
The primary driver for the increase in operating expense was incremental healthcare-related expenses attributable to COVID-19 of $12.0 million. Such expenses included increased labor expenses, testing and the increased costs of personal protective
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equipment,
food and infection control supplies. Excluding the increased healthcare-related expenses attributable to COVID-19, we benefited from our cost saving initiatives that favorably impacted certain clinical labor costs and nursing and ancillary costs in addition to decreased health insurance costs.
Lease Expense
Lease expense in the first quarter of 2021 decreased to $13.2 million as compared to $13.5 million in the first quarter of 2020, a decrease of $0.3 million. The decrease in lease expense was due to the amendment to the Omega Master Lease in conjunction with the transfer of operations of the facility located in Florida.
Professional Liability
Professional liability expense was $2.1 million and $1.8 million in the first quarters of 2021 and 2020, respectively. Our cash expenditures for professional
liability costs, including those relative to claims for the centers that we formerly operated in the State of Kentucky, were $1.5 million and $1.8 million for the first quarters of 2021 and 2020, respectively. Professional liability expense fluctuates based on the results of our third-party professional liability actuarial studies, premiums and cash expenditures are incurred to defend and settle existing claims. See “Liquidity and Capital Resources” for further discussion of the accrual for professional liability.
General and Administrative Expense
General and administrative expense remained consistent at $6.8 million in the first quarter of 2021 and in 2020.
Depreciation and Amortization
Depreciation and amortization expense remained consistent at $2.3 million in the first quarter of
2021 and in 2020.
Interest Expense, Net
Interest expense was $1.0 million in the first quarter of 2021 and $1.5 million in the first quarter of 2020. The decrease of $0.5 million was due to a decrease in the outstanding borrowings on our loan facilities.
Income from Continuing Operations before Income Taxes; Loss from Continuing Operations per Common Share
As a result of the above, continuing operations reported income of $2.5 million before income taxes for the first quarter of 2021 as compared to a loss of $0.6 million for the first quarter of 2020. The basic and diluted income per common share from continuing operations were $0.33 and $0.32 for the first quarter of 2021, respectively, compared to both basic and diluted loss per common share from continuing operations of $0.08 in the first
quarter of 2020.
COVID-19 Impact on Continuing Operations
Since the end of the quarter, there have been additional cases of COVID-19 at certain of our centers. The Company has continued to experience reduced occupancy and increased operating expenses at its centers in the form of increased labor costs, testing and the increased cost of personal protective equipment, food and infection control supplies. The Company expects such increased expenses to continue throughout 2021.
Liquidity and Capital Resources
COVID-19
Impact on Liquidity
The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business. While the Company incurred significant disruptions since the start of the COVID-19 pandemic, it is unable to fully predict the impact that the COVID-19 pandemic will have on its liquidity, financial condition and results of operations due to numerous uncertainties. As a result of the COVID-19 pandemic, we have recognized less revenue and increased operating expenses, but we have received additional stimulus funds through the PHSSEF since the start of the pandemic, which have been used and are expected to continue to be used to mitigate the impact of the reduced revenues and increased operating expenses, and any cash flow or liquidity impacts
therefrom. The increased operating expenses include increased labor costs, testing and the increased costs of personal protective equipment, food and infection control supplies. Refer to Note 4, "COVID-19 Pandemic" to the interim consolidated financial statements.
Liquidity
Our primary sources of liquidity are the net cash flow provided by the operating activities of our centers and draws on our revolving credit facility. We believe that these internally generated cash flows will be adequate to service existing debt obligations and fund required capital expenditures for twelve months after the date of issuance of these interim financial statements. In determining priorities for our cash flow, we evaluate alternatives available to us and select the ones that we believe will most benefit us over the long-term. Options for our use of cash include, but are not limited to, capital
improvements, purchase of additional shares of our common stock, acquisitions, payment of existing debt obligations as well as
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initiatives to improve nursing center performance. We review these potential uses and align them to our cash flows with a goal of achieving long-term success.
Net cash provided by operating activities of continuing operations totaled $3.4 million for the three months ended March 31, 2021, compared to net cash provided by operating activities of continuing operations of $2.7 million in the same period of 2020. The primary drivers of the increase in net cash provided by operating activities were income from continuing operations. A decrease in accounts receivable
due to a decline in census as well as increased collections also contributed to the increase in cash provided by operating activities for the three months ended March 31, 2021 compared to March 31, 2020.
Our cash expenditures related to professional liability claims of continuing operations were $1.5 million and $1.8 million for the three months ended March 31, 2021 and 2020, respectively. Although we work diligently to limit the cash required to settle and defend professional liability claims, a significant judgment entered against us in one or more legal actions could have a material adverse impact on our cash flows and could result in our inability to meet all of our cash needs as they become due.
Investing
activities of continuing operations used cash of $1.5 million and $0.9 million for the three months ended March 31, 2021 and 2020, respectively. The cash used for investing activities represents capital expenditures for improvements to our centers and purchases of clinical equipment to assist with fighting and slowing the spread of COVID-19.
Net cash used in financing activities of continuing operation were nearly zero for the three months ended March 31, 2021 and 2020.
Professional Liability
The Company has professional liability insurance coverage for its
nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a wholly-owned, offshore limited purpose insurance subsidiary, SHC, which has issued a policy insuring claims made against all of the Company's nursing centers in Florida and Tennessee, and several of the Company's nursing centers in Alabama, Ohio, and Texas, as well as those previously operated by the Company in Kentucky. The insurance coverage provided for these centers under the SHC policy
provides coverage limits of at least $1.0 million per medical incident with a sublimit per center of $3.0 million and total annual aggregate policy limits of $5.0 million. All other centers within the Company's portfolio are covered through various commercial insurance policies which provide similar coverage limits per medical incident, per location, and on an aggregate basis for covered centers. The deductibles for these policies are covered through the insurance subsidiary.
As of March 31, 2021, we have recorded total liabilities for reported and settled professional liability claims and estimates for incurred, but unreported claims of $24.8 million. Our calculation of this estimated liability is based on the
Company's best estimate of the likelihood of adverse judgments with respect to any asserted claim; however, a significant judgment could be entered against us in one or more of these legal actions, and such a judgment could have a material adverse impact on our financial position and cash flows.
Capital Resources
The Company maintains a credit facility with a syndicate of banks. The Company originally entered into the credit facility in May 2013, and subsequently amended the facility. As of December 31, 2019, the credit facility consisted of a mortgage loan of $67.5 million, an acquisition loan with a borrowing capacity of $12.5 million, a revolver with a borrowing
capacity of $40.3 million and an affiliated revolver with a borrowing capacity of $2.0 million.
On October 14, 2020, the Company executed an Amended and Restated Credit Agreement (the "Credit Agreement") with a syndicate of banks, which consists of a $62.0 million mortgage loan subsequently amended ("Amended Mortgage Loan"), a $36.0 million revolver subsequently amended ("Amended Revolver") and a $2.0 million affiliated revolver amended ("Amended Affiliated Revolver"). The Amended Mortgage Loan, Amended Revolver and Amended Affiliated Revolver have a 3-year maturity through September 30, 2023. The Amended Mortgage Loan has a term of 3 years, with principal and interest payable monthly based on a 25-year amortization.
Interest on the term loan facility is based on LIBOR plus 4.0% with a 1.0% floor. The Amended Mortgage Loan balance was $60.8 million as of March 31, 2021 with an interest rate of 5.0%. The Amended Mortgage Loan consolidated the mortgage and acquisition loans. The Amended Mortgage Loan is secured by 15 owned nursing centers, related equipment and a lien on the accounts receivable of these centers. The Amended Mortgage Loan, the Amended Revolver and the Amended Affiliated Revolver are cross-collateralized and cross-defaulted. The Company’s Amended Revolver and Amended Affiliated Revolver have an interest rate of LIBOR plus 4.0% and are secured by accounts receivable and are subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions.
As
of March 31, 2021, we had $61.2 million of outstanding long-term debt and finance lease obligations. The $61.2 million total includes $0.4 million in finance lease obligations.
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As of March 31, 2021 and December 31, 2020, the Company had no outstanding borrowings under its revolvers. The interest rate related to the revolvers was 5.0% as of March 31, 2021. Annual fees for letters of credit issued under the Amended Revolver are 3.0% of the amount outstanding. The
Company has four letters of credit with a total value of $12.4 million outstanding as of March 31, 2021. Considering the balance of eligible accounts receivable, the letters of credit, the amounts outstanding under the Amended Revolver and the Amended Affiliated Revolver, and the maximum loan amount of $24.4 million for these revolvers, the balance available for borrowing under the revolvers was $12.0 million at March 31, 2021.
Our lending agreements contain various financial covenants, the most restrictive of which relates to debt service coverage ratios. We are in compliance with all such covenants at March 31, 2021.
Our calculated compliance with financial covenants is presented below:
We have four letters of credit outstanding with an aggregate value of approximately $12.4 million as of March 31, 2021. The letters of credit serve
as a security deposits for certain center leases. These letters of credit were issued under our revolving credit facility. Our accounts receivable serve as the collateral for this revolving credit facility.
Forward-Looking Statements
The foregoing discussion and analysis provides information deemed by management to be relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion and analysis should be read in conjunction with our interim consolidated financial statements included herein. Certain statements made by or on behalf of us, including those contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere,
are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by the forward-looking statements made herein. Forward-looking statements are predictive in nature and are frequently identified by the use of terms such as "may,""will,""should,""expect,""believe,""estimate,""intend," and similar words indicating possible future expectations, events or actions. In addition to any assumptions and other factors referred to specifically in connection with such statements, other factors, many of which are beyond our ability to control or predict, could cause our actual results to differ materially from the results expressed or implied in any forward-looking statements including, but not limited to:
•the potential adverse effect of the COVID-19 pandemic on
the economy, our patients and residents and supply chain, including, changes in the occupancy of our centers, increased operation costs in addressing COVID-19, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operations challenges faced by its patients served,
•the duration and severity of the COVID-19 pandemic and the extent and severity of the impact on the Company's patients and residents,
•actions governments take in response to the COVID-19 pandemic, including the introduction of public health measures and other regulations affecting our centers, and the timing,
availability, and adoption of effective medical treatments and vaccines,
•the impact of the CARES Act, the PPPHCE Act, the CAA and the ARPA and any other COVID-19 relief aid adopted by governments or the implementation or modifications to such acts, including any obligation of the Company to repay any stimulus payments received under such relief aid,
•perceptions regarding the safety of senior living communities during and after the pandemic, changes in demand for senior living communities and our ability to adapt our sales and marketing efforts to meet the demand, changes in the acuity levels of our new residents, the disproportionate impact of COVID-19 on seniors generally and those residing in our communities,
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•increased
regulatory requirements, including unfunded mandatory testing, increased enforcement actions resulting from COVID-19, including those that may limit our collection efforts for delinquent accounts and the frequency and magnitude of legal actions and liability claims that may arise due to COVID-19 or our response efforts,
•our ability to successfully integrate the operations of new nursing centers, as well as successfully operate all of our centers,
•our ability to increase census at our centers and occupancy rates at our centers,
•changes in governmental reimbursement, including the Patient-Driven Payment Model that was implemented in October of 2019,
•government regulation,
•the
impact of the Affordable Care Act, efforts to repeal or further modify the Affordable Care Act, and other health care reform initiatives,
•any increases in the cost of borrowing under our credit agreements,
•our ability to comply with covenants contained in those credit agreements,
•our ability to comply with the terms of our master lease agreements,
•our ability to renew or extend our leases at or prior to the end of the existing lease terms,
•the outcome of professional liability lawsuits and claims,
•our ability to control ultimate professional liability costs,
•the accuracy of our estimate of our anticipated professional liability expense,
•the impact of future licensing surveys,
•our ability to comply with the terms of our Corporate Integrity Agreement,
•the outcome of proceedings alleging violations of state or Federal False Claims Acts,
•laws and regulations governing quality of care or other laws and regulations applicable to our business including HIPAA and laws governing reimbursement from government payors,
•the costs of investing in our business initiatives and development,
•our
ability to control costs,
•our ability to attract and retain qualified healthcare professionals,
•changes to our valuation of deferred tax assets,
•changing economic and competitive conditions,
•changes in anticipated revenue and cost growth,
•changes in the anticipated results of operations,
•the effect of changes in accounting policies as well as others.
Investors also should refer to the risks identified in this “Management's Discussion and Analysis of Financial Condition and Results of Operations” as well as
risks identified in “Part I. Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2020 and in "Part II. Item 1A. Risk Factors" below, for a discussion of various risk factors of the Company and that are inherent in the health care industry. Given these risks and uncertainties, we can give no assurances that these forward-looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them. These assumptions may not materialize to the extent assumed, and risks and uncertainties may cause actual results to be different from anticipated results. These risks and uncertainties also may result in changes to the Company’s business plans and prospects. Such cautionary
statements identify important factors that could cause our actual results to materially differ from those projected in forward-looking statements. In addition, we disclaim any intent or obligation to update these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The chief market risk factor affecting our financial condition and operating results is interest rate risk. As of March 31, 2021, we had outstanding borrowings of approximately $60.8 million, which was subject to variable interest rates.
ITEM 4. CONTROLS
AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), our management, including our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of March 31, 2021. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed
33
in our reports filed or submitted under the Exchange Act, such as this Quarterly Report
on Form 10-Q, is properly recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission’s rules and forms. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures that, by their nature, can provide only reasonable assurance regarding management’s control objectives. Management does not expect that its disclosure controls and procedures will prevent all errors and fraud. A control system, irrespective of how well it is designed and operated, can only provide reasonable assurance, and cannot guarantee that it will succeed in its stated objectives.
Based on an evaluation of the effectiveness of the design and operation of disclosure controls and procedures, our chief executive officer and chief financial officer concluded that, as of March 31, 2021, our disclosure controls
and procedures were effective in reaching a reasonable level of 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 period specified in the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control Over Financial Reporting
There have been no changes to our internal control over financial reporting during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART
II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The provision of health care services entails an inherent risk of liability. Participants in the health care industry are subject to lawsuits alleging malpractice, negligence, violations of false claims acts, product liability, or related legal theories, many of which involve large claims and significant defense costs. Like many other companies engaged in the long-term care profession in the United States, we have numerous pending liability claims, disputes and legal actions for professional liability and other related issues. It is expected that we will continue to be subject to such suits as a result of the nature of our business. Further, as with all health care providers, we
are periodically subject to regulatory actions seeking fines and penalties for alleged violations of health care laws and are potentially subject to the increased scrutiny of regulators for issues related to compliance with health care fraud and abuse laws and with respect to the quality of care provided to residents of our facilities. Like other health care providers, in the ordinary course of our business, we are also subject to claims made by employees and other disputes and litigation arising from the conduct of our business.
As of March 31, 2021, we are engaged in 79 professional liability lawsuits. Twenty-one lawsuits are currently scheduled for trial or arbitration during the next twelve months, and it is expected that additional cases will be set for trial or hearing. The ultimate results of any of our professional liability claims and disputes cannot be predicted. We
have limited, and sometimes no, professional liability insurance with regard to most of these claims. A significant judgment entered against us in one or more of these legal actions could have a material adverse impact on our financial position and cash flows.
In February 2020, we entered into a settlement agreement with the U.S. Department of Justice and the State of Tennessee of actions alleging violations of the federal False Claims Act in connection with our provision of therapy and the completion of certain resident admission forms. This settlement resolved an investigation that had begun in 2012 and covers the time period from January 1, 2010 through December 31, 2015. This agreement requires material annual payments for a period of five years ending in February 2025 and also requires a contingent payment in the event
the Company sells any of its owned facilities during the five year payment period. Failure to timely make any of these payments could result in rescission of the settlement and result in the government having a very large claim against us, including penalties, and/or make us ineligible to participate in certain government funded healthcare programs, any of which could in turn significantly harm our business and financial condition.
In conjunction with the settlement of the government investigation related to our therapy practices, we entered into a corporate integrity agreement (the "CIA") with the Office of the Inspector General of CMS. The CIA has a term of five years and imposes material burdens on the Company, its officers and directors to take actions
designed to insure compliance with applicable healthcare laws, including requirements to maintain specific compliance positions within the Company, to report any non-compliance with the terms of the CIA, to return any overpayments received, to submit annual reports and for an annual audit of submitted claims by an independent review organization. The CIA sets forth penalties for non-compliance by the Company with the terms of the agreement, including possible exclusion from federally funded healthcare programs for material violations of the CIA.
In January 2009, a purported class action complaint was filed in the Circuit Court of Garland County, Arkansas against the Company
and certain of its subsidiaries and Garland Nursing & Rehabilitation Center (the “Center”). The Company answered the original complaint in 2009, and there was no other activity in the case until May 2017. At that time, plaintiff filed an amended complaint asserting new causes of action. The amended complaint alleges that the defendants breached their statutory and contractual obligations to the patients of the Center over a multi-year period by failing to meet minimum staffing requirements, failing to otherwise adequately staff the Center and failing to provide a clean and safe living environment in the Center. The Company filed an answer to the amended complaint denying plaintiffs’ allegations and
asked the Court to dismiss the new causes of action asserted in the amended complaint because the Company was prejudiced by plaintiff’s long delay in filing the amended complaint. The Court has not yet ruled on the motion to dismiss, so the lawsuit remains in its early stages and has not yet been certified by the court as a class action. The Company intends to defend the lawsuit vigorously.
We cannot currently predict with certainty the ultimate impact of any of the above cases on our financial condition, cash flows or results of operations. An unfavorable outcome in any of these lawsuits, any of our professional liability actions, any regulatory action, or any investigation or lawsuit alleging violations of fraud and abuse laws or of elderly abuse laws or
any state or Federal False Claims Act law could subject us to fines, penalties and damages, including exclusion from the Medicare or Medicaid programs, and could have a material adverse impact on our financial condition, cash flows or results of operations.
ITEM 1A. RISK FACTORS.
In addition to the other information set forth in this report, you should carefully consider the risks and uncertainties discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we currently deem to be not material also may materially and adversely affect our business, financial condition and/or operating results. We are
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including the following revised risk factor, which updates and supersedes the corresponding risk factor disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, which should be read in conjunction with our description of risk factors in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2020:
Changes in the method of determining
LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest rates on our current or future indebtedness and may otherwise adversely affect our financial condition and results of operations.
On March 5, 2021, the Financial Conduct Authority (“FCA”) announced that USD LIBOR will no longer be published after June 30, 2023. This announcement has several implications, including setting the spread that may be used to automatically convert contracts from LIBOR to the Secured Overnight Financing Rate ("SOFR"). Additionally, banking regulators are encouraging banks to discontinue new LIBOR debt issuances by December 31, 2021.
The
Company anticipates that LIBOR will continue to be available at least until June 30, 2023. Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.
The Company has contracts that are indexed to LIBOR and is monitoring and evaluating the related risks, which include interest on loans, amounts paid on securities, or amounts paid
on derivative instruments. These risks arise in connection with transitioning contracts to an alternative rate, including any resulting value transfer that may occur, and are likely to vary by contract. The value of loans, securities, or derivative instruments tied to LIBOR, as well as interest rates on our current or future indebtedness, may also be impacted if LIBOR is limited or discontinued. For some instruments the method of transitioning to an alternative reference rate may be challenging, especially if we cannot agree with the respective counterparty about how to make the transition.
While we expect LIBOR to be available in substantially its current form until at least the end of June 30, 2023,
it is possible that LIBOR will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified.
Alternative rates and other market changes related to the replacement of LIBOR, including the introduction of financial products and changes in market practices, may lead to risk modeling and valuation challenges, such as adjusting interest rate accrual calculations and building a term structure for an alternative rate.
The introduction of an alternative rate also may create additional basis risk and increased volatility as alternative rates are phased in and utilized in parallel with LIBOR.
Adjustments to systems and mathematical models to
properly process and account for alternative rates will be required, which may strain the model risk management and information technology functions and result in substantial incremental costs for the company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURE.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
The
following exhibits are filed as part of this report on Form 10-Q.
Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement No. 33-76150 on Form S-1 filed in paper - hyperlink is not required
pursuant to Rule 105 of Regulation S-T).
Certificate of Ownership and Merger of Diversicare Healthcare Services, Inc. with and into Advocat Inc. (incorporated by reference to Exhibit 3.1 to the
Company's current report on Form 8-K filed March 14, 2013).
Form of Common
Stock Certificate (incorporated by reference to Exhibit 4 to the Company's Registration Statement No. 33-76150 on Form S-1 filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T).
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
