REGIONAL HEALTH PROPERTIES, INC. Overview
We plan to grow our Real Estate segment while diversifying our portfolio by tenant and facility type within the healthcare sector. We plan to achieve these objectives primarily through making investments directly or indirectly in healthcare real estate, including investments in joint ventures with larger health care investors.
Industry Trends and Uncertainties Our operations have been and are expected to continue to be impacted by economic and market conditions. Together with the ongoing impact of the COVID-19 pandemic, increases in interest rates, labor shortages, supply chain disruptions, high inflation and increased volatility in public equity and fixed income markets have led to increased costs and limited the availability of capital. In 2022, several of our operators notified us that they could not continue to maintain the lease payment given the state of the facilities operations. In addition, one operator was notified by theState of Alabama to transition the facility to a new operators or the state was going to shut down the facility. COVID-19 Pandemic. Many of our operators have reported incurring significant cost increases as a result of the COVID-19 pandemic. We believe these increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of personal protective equipment, testing equipment, processes and supplies. In terms of occupancy levels, many of our operators have reported experiencing declines, in part due to the elimination or suspension of elective hospital procedures, fewer discharges from hospitals to SNFs, and higher hospital readmittances from SNFs. The COVID-19 pandemic may also lead to temporary closures of nursing facilities operated by our tenants, impairing our tenants' ability to make their rental payments to us pursuant to their respective lease agreements. Portfolio Stabilization Measures. In the past our operators did not provide lease guarantees from affiliated entities. Given this, certain operators have terminated their leases in light of operational difficulties caused by the COVID-19 pandemic. While the Company is a self-managed real estate investment company that invests in real estate, when business conditions require, the Company undertakes portfolio stabilization measures. The table below summarizes the lease terminations since the onset of the COVID-19 pandemic and the Company's resulting portfolio stabilization measures: Date Facility Name Former Current Operator Operator January 2021 Powder Springs Nursing Wellington Released to Empire Care and Rehabilitation Center Healthcare Centers Services
Nursing and Healthcare (managed by
Rehabilitation Center Services
April 2022 Meadowood Retirement C.R. Regional
Village Management (managed by Cavalier Senior
Living)
May 2022 LaGrange Nursing and C.R. Regional
Rehabilitation Center Management (managed by
Rehabilitation Center Management (managed by Peach Health)
July 2022 Thomasville Nursing and C.R. Regional
Rehabilitation Center Management
August 2022 Glenvue Health and Rehab C.R. Regional
Management (managed by Peach Health)
November 2022 Georgetown Healthcare & Symmetry Oak Hollow Healthcare
Rehabilitation Management
November 2022 Sumter Valley Nursing and Symmetry Oak Hollow Healthcare
Rehab Center Management
For more information, see Note 1 - Summary of Significant Accounting Policies, Note 6 - Leases and Note 9 - Segment Results. to our audited consolidated financial statements in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report.
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On December 30, 2022 , the Company and Spring Valley, LLC ("Landlord") entered
into a Lease Termination Agreement (the "Lease Termination Agreement") relating
to the lease (the "Lease") of the following eight nursing facilities: the Powder
Springs facility, the Thomasville facility, the Jeffersonville facility, the
Lumber City facility, the LaGrange facility, the Tara facility, the Oceanside
facility and the Savannah Beach facility (collectively, the "Facilities"). The
Lease Termination Agreement provides that the Lease was terminated effective as
of December 7, 2022 (the "Lease Termination Date"). In connection with the
foregoing, Tenant entered into certain Operations Transfer Agreements (the
"Operations Transfer Agreements") with each of TV Thomasville LLC , LC Lumber
City LLC , LG Lagrange LLC and TB Thunderbolt LLC (the "New Operators"), each
with an effective date as of the Lease Termination Date. The Operations Transfer
Agreements contain market industry terms.
Pursuant to the Lease Termination Agreement, (a) Landlord forgave all past due
and current rent, late penalties, and additional rent for taxes due under the
Lease as of the Lease Termination Date, as well as all accrued and unpaid
interest and unpaid principal under the Promissory Note dated September 30,
2022 , (b) Tenant and the Company remain liable to Landlord for any nursing home
provider fees owed to the State of Georgia arising on or before the Lease
Termination Date ("Unpaid Provider Fees"), (c) to fund any reimbursement for
Unpaid Provider Fees, Tenant agreed to enter into a Promissory Note with a line
of credit feature in favor of Landlord in the principal sum of $2,700,000
bearing an interest rate of 6.25%, payable monthly over 24 months, secured by
Tenant's accounts receivables associated with the facilities and earned prior to
the Lease Termination Date, and guaranteed by the Company, and (d) except as set
forth in the Lease Termination Agreement, Landlord, Tenant and the Company
agreed to a release of claims. As consideration for Landlord's agreement to
enter into the Lease Termination Agreement and accelerate the expiration date of
the term of the Lease, Tenant and its affiliates, including the Company, agreed
to cooperate with Landlord and any third parties, including the New Operators,
to continue the operation of and transfer the ownership of the Facilities with
an effective date as of the Lease Termination Date.
Notes Receivable:
Peach Health Group
In connection with a master sublease agreement as amended on March 30, 2018 ,
originally dated June 18, 2016 , that the Company entered into with affiliates of
Peach Health , the Company extended a line of credit to Peach Health (the "Peach
Line"), which was subordinated to a line of credit extended to Peach Health by a
third-party lender (the "Peach Working Capital Facility"). On August 27, 2020 ,
subsequent to Peach Health repaying their Peach Working Capital Facility, the
Company and Peach Health modified the Peach Line to: (i) reduce the
then-outstanding $1.3 million balance under the Peach Line to approximately $0.5
million , in connection with which Peach Health paid to the Company $0.45 million
in cash and the Company accepted $0.35 million non-cash payment in exchange for
Peach Health assuming from the Company certain bed tax liabilities related to
facilities their affiliates operate; (ii) extend the maturity date of the Peach
Line to August 1, 2025 ; (iii) decrease the interest rate from 16.5% to 8% per
annum; and (iv) Peach Health agreed not to pledge, hypothecate or grant any
security interest in their collateral to any other party, other than their
current arrangement with the U.S. Small Business Administration (the "SBA"),
without the Company's prior written consent. The remaining balance under the
Peach Line shall be paid by Peach Health to the Company in 60 equal monthly
installments. As of December 31, 2022 , in accordance with the Peach Line terms,
32 such installments remain.
Symmetry Healthcare Management
Effective October, 21, 2022, the Company terminated the leases for two skilled nursing facilities located inSouth Carolina with affiliates ofDawn Healthcare (a subsidiary of Symmetry Healthcare Management). As part of the termination,Dawn Healthcare entered into a promissory note to pay the Company$407,199 in 14 installments of$29,085 each beginning inJanuary 2023 .
In connection with the Operations Transfer Agreement forLumber City ,Beacon Health and the Company entered into a promissory note in the amount of$546,690 . The balance will be paid over 24 months in amount of$24,000 per month. The principal balance will accrue at the rate of 8% annually. 43 --------------------------------------------------------------------------------
The Company made no acquisitions or dispositions during the years ended
For further information, see Note 1 - Summary of Significant Accounting Policies, and Note 8 - Notes Payable and Other Debt, to our audited consolidated financial statements included in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report. Results of Operations
Years Ended
The following table sets forth, for the periods indicated, statement of
operations items and the amount and percentage of change of these items. The
results of operations for any particular period are not necessarily indicative
of results for any future period. The following data should be read in
conjunction with our audited consolidated financial statements and the notes
thereto, which are included in Part II, Item 8., "Financial Statements and
Supplementary Data" in this Annual Report.
Year Ended December 31, Increase (Decrease)
(Amounts in 000's) 2022 2021 Amount Percent
Revenues:
Patient care revenues 22,060 $ 9,485 12,575 132.6 %
Rental revenues 12,794 16,093 (3,299 ) (20.5 )%
Management fees 1,045 1,021 24 2.3 %
Other revenues 26 91 (65 ) (71.5 )%
Total revenues 35,925 26,690 9,235 34.6 %
Expenses:
Patient care expense 20,453 9,243 11,210 121.3 %
Facility rent expense 4,876 6,464 (1,588 ) (24.6 )%
Cost of management fees 619 672 (53 ) (7.9 )%
Depreciation and amortization 2,404 2,591 (187 ) (7.2 )%
General and administrative
expense 4,652 3,931 721 18.3 %
Doubtful accounts expense
(recovery) 4,916 182 4,734 2601.1 %
Loss on disposal of assets 1,417 - 1,417 -
Loss on Lease Termination 1,436 - 1,436 -
Other operating expenses 1,974 1,074 900 83.8 %
Total expenses 42,747 24,157 18,590 77.0 %
Income from operations (6,822 ) 2,533 (9,355 ) (369.3 )%
Other expense (income):
Interest expense, net 2,529 2,669 (140 ) (5.2 )%
(Gain) Loss on extinguishment
of debt 452 (146 ) 598 (409.6 )%
Other (income) expense, net (2,936 ) 1,192 (4,128 ) (346.3 )%
Total other expense, net 45 3,715 (3,670 ) (98.8 )%
Net loss $ (6,867 ) $ (1,182 ) $ (5,685 ) 481.0 %
*Not meaningful ("NM").
Year Ended
Patient care revenues- Patient care revenues for our Healthcare Services
segment, as a result of the Company taking over operations at the
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and the Glenvue location in August of 2022, increased to $22.1 million for the
year ended December 31, 2022 from approximately $9.5 million for the year ended
December 31, 2021 .
Rental revenues.- Total rental revenue decreased by approximately $3.3 million ,
or 20.5%, to $12.8 million for the year ended December 31, 2022 , compared with
$16.1 million for the year ended December 31, 2021 . The decrease reflects
approximately $3.1 million decrease in straight-line rent due to the C.R
Management and Beacon Health Management Lease Terminations recognized for the
year ended December 31, 2022 . For further information see Note 6 - Leases, to
our audited consolidated financial statements in Part II, Item 8., "Financial
Statements and Supplementary Data" included in this Annual Report.
Other revenues-Other revenues decreased by approximately
Patient care expense-Patient care expense was$20.5 million for the year endedDecember 31, 2022 , up from$9.2 million for the twelve months endedDecember 31, 2021 . The current period expense, which required an increased level of staffing, is due to the additional facilities we operated when compared to the prior year. Facility rent expense-Facility rent decreased by approximately$1.6 million , or 24.6%, to$4.9 million for the year endedDecember 31, 2022 , compared with approximately$6.5 million for the year endedDecember 31, 2021 . The decrease is due primarily to an amendment to the Foster Lease as well as forgiveness for unpaid rent. See Note 6 - Leases, to our audited consolidated financial statements included in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report. Depreciation and amortization-Depreciation and amortization decreased by approximately$0.2 million or 7.2%, to$2.4 million for the year endedDecember 31, 2022 , compared with$2.6 million for the year endedDecember 31, 2021 . The decrease is primarily due to the reduction in depreciation from fully depreciated equipment and computer related assets in the current year. Year Ended December 31, Increase (Decrease) (Amounts in 000's) 2022 2021 Amount Percent General and administrative expenses: Real Estate Services$ 3,458 $ 3,427 $ 31 0.9 % Healthcare Services 1,194 504 690 NM Total$ 4,652 $ 3,931 $ 721 18.3 % General and administrative- General and administrative costs increased by$0.7 million , or 18.3%, to$4.7 million for the year endedDecember 31, 2022 , compared with$3.9 million for the year endedDecember 31, 2021 . The increase within Healthcare Services is driven predominantly by the additional facilities which we're currently operating. For the Real Estate Services segment, the expenses were roughly flat year over year. 45 --------------------------------------------------------------------------------
Year Ended December 31, Increase (Decrease)
(Amounts in 000's) 2022 2021 Amount Percent
Provision (recovery) for doubtful
accounts:
Real Estate Services $ 4,298 $ (78 ) $ 4,376 NM
Healthcare Services (private payor) 618 260 358 137.7 %
Total $ 4,916 $ 182 $ 4,734 2601.1 %
Provision (recovery) for doubtful accounts-Provision for doubtful accounts
expense increased by approximately $4.7 million , to approximately $4.9 million ,
for the year ended December 31, 2022 , compared with $0.2 million for the year
ended December 31, 2021 . This increase in expense is due to a $4.2 million
provision for doubtful accounts recorded for non-payment of rent and from
reductions taken to gain cooperation in transitioning facilities to a new
operator as well as the impairment of straight-line rent associated with the
lease terminations of Lumber City , LaGrange , Thomasville , Glenvue, Sumter,
Southland and Georgetown within our Real Estate Services segment.
Loss on extinguishment of debt- Loss on extinguishment of debt is due to the
refinancing of three facilities with HUD, see Note 2 - Liquidity to our audited
consolidated financial statements included in Part II, Item 8., "Financial
Statements and Supplementary Data." in this Annual Report.
Loss on Disposal of Assets- The loss on the disposal of assets for the year
ended December, 31, 2022 is comprised of
Year Ended December 31, Increase (Decrease)
(Amounts in 000's) 2022 2021 Amount Percent
Other operating expenses:
Real Estate Services $ 631 $ 1,016 $ (385 ) (37.9 )%
Healthcare Services 1,343 58 1,285 NM
Total $ 1,974 $ 1,074 $ 900 83.8 %
Other operating expenses - Other operating expenses increased by approximately
$0.9 million or 84%, to $2.0 million for the year ended December 31, 2022 ,
compared with $1.1 million for the year ended December 31, 2021 . The increase
was due to professional and legal services related to operator transition
transactions and additional expenses incurred in the current year from our
expanded Healthcare Services segment.
Interest expense, net-Interest expense, net decreased by approximately $0.1
million or 5.2%, to $2.5 million for the year ended December 31, 2022 , compared
with $2.7 million for the year ended December 31, 2021 . The decrease reflects
the lower amount of debt outstanding. See Note 8 - Notes Payable and Other Debt
to our audited consolidated financial statements included in Part II, Item 8.,
"Financial Statements and Supplementary Data." of this Annual Report
Loss on Lease Termination- The loss on lease termination for the twelve months
ended December 31, 2022 is comprised of the write-off of straight line rent and
a right of use asset.
Other expense, net- Other expense, net decreased by approximately $4.1 million ,
generating income of $2.9 million , for the year ended December 31, 2022 ,
compared with an expense of $1.2 million in the year ended December 31, 2021 .
These expenses in both years are related to professional and legal services to
evaluate and assist with possible opportunities to improve the Company's capital
structure. The expenses were offset by a $2.4 million gain related to the
write-down of certain accounts payable balances for unclaimed property.
Liquidity and Capital Resources
The Company intends to pursue measures to grow its operations, streamline its
cost infrastructure and otherwise increase liquidity, including: (i) refinancing
or repaying debt to reduce interest costs and mandatory principal repayments,
with such repayment to be funded through potentially expanding borrowing
arrangements with certain lenders; (ii) increasing future lease revenue through
acquisitions and investments in existing properties; (iii) modifying
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--------------------------------------------------------------------------------the terms of existing leases; (iv) replacing certain tenants who default on their lease payment terms; and (v) reducing other and general and administrative expenses.
Management anticipates access to several sources of liquidity, including cash on hand, collection of patient accounts receivable, and debt refinancing during the twelve months from the date of this filing. AtDecember 31, 2022 , the Company had$0.8 million in unrestricted cash, including a Medicaid overpayment of$0.2 million , which was included in "Accrued Expenses" in the Company's consolidated balance sheet as ofDecember 31, 2022 and repaid by the time of this filing. In addition, as ofDecember 31, 2022 the Company had$7.6 million of accounts receivable, mainly consisting of patient account receivables, which the Company plans to collect over the next twelve months. During the year endedDecember 31, 2022 , the Company generated negative cash flow from continuing operations of$3.5 million , mostly due to the increase in patient accounts receivable. The Company anticipates positive cash flow from operations in the future as the patient accounts receivable is collected, subject to the continued uncertainty in the industry, including the COVID-19 pandemic, and its impact on the Company's business, financial condition, and results of operations. Subsequent to year end, the Company collected$1.9 million from the Employee Retention Tax Credit and continues to focus on collecting the patient receivables generated from operating five skilled nursing facilities inGeorgia in 2022. The Company is current with all of its debt and other financial obligations. During the year endedDecember 31, 2020 , the Company benefited from various, stimulus measures not made available during the year endedDecember 31, 2021 , made available to it through the CARES Act enacted byCongress in response to the COVID-19 pandemic which allowed for, among other things: (i) a deferral of debt service payments onU.S. Department of Agriculture ("USDA") loans to maturity, (ii) an allowance for debt service payments to be made out of replacement reserve accounts forU.S. Department of Housing and Urban Development ("HUD") loans and (iii) debt service payments to be made by the SBA on all SBA loans. For further information see Note 8 - Notes Payable and Other Debt to our audited consolidated financial statements included in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report. In early 2020, the Company began on-going efforts to investigate alternatives to retire or refinance our outstanding Series A Preferred Stock through privately negotiated transactions, open market repurchases, redemptions, exchange offers, tender offers, or otherwise. Our ability to retire or refinance our outstanding Series A Preferred Stock will depend on the capital markets and our financial condition at such time. There can be no assurance that any such alternative will be pursued or accomplished, and we may not be able to engage in any of these activities or engage in any of these activities on desirable terms. Costs associated with these efforts have been expensed as incurred in "Other expense, net" and were$1.3 million and approximately$1.2 million for the year endedDecember 31, 2022 andDecember 31, 2021 , respectively.
Series A Preferred Dividend Suspension
We suspended the quarterly dividend payment with respect to our Series A Preferred Stock commencing with the fourth quarter of 2017, and onJune 8, 2018 , the Board suspended quarterly dividend payments indefinitely with respect to the Series A Preferred Stock. As ofDecember 31, 2022 , as a result of the suspension of the dividend payment on the Series A Preferred Stock commencing with the fourth quarter 2017 dividend period, the Company has approximately$45.9 million of undeclared Series A Preferred Stock dividends in arrears. The dividend suspension has provided the Company with additional funds to meet its ongoing liquidity needs. As the Company has failed to pay cash dividends on the outstanding Series A Preferred Stock in full for more than four dividends periods, the annual dividend rate on the Series A Preferred Stock for the fifth and future missed dividend periods has increased to 12.875%, which is equivalent to approximately$3.20 per share each year, commencing on the first day after the missed fourth quarterly payment (October 1, 2018 ) and continuing until the second consecutive dividend payment 47 --------------------------------------------------------------------------------
date following such time as the Company has paid all accumulated and unpaid dividends on the Series A Preferred Stock in full in cash.
Debt
As ofDecember 31, 2022 , the Company had$52.2 million in indebtedness, net of$1.1 million deferred financing and unamortized discounts. The Company anticipates net principal repayments of approximately$1.8 million during the next twelve-month period, which include approximately$1.3 million of routine debt service amortization, approximately$0.4 million payments on other non-routine debt and a$0.1 million payment of bond debt. Debt Refinance. OnOctober 21, 2022 , the Company, through wholly-owned subsidiaries, consummated a HUD refinancing of its senior mortgages on three SNFs inOhio . Funding was provided byNewpoint Real Estate Capital LLC ("Newpoint") pursuant to three HUD guaranteed secured Healthcare Facility Notes (the "HUD Notes"). Proceeds from the HUD Notes were used to pay off existing HUD guaranteed secured mortgages and pay transaction costs.Newpoint is the servicer on other loans extended to the Company. The aggregate principal amount of the three HUD Notes is$7.8 million , and the interest rate on the three HUD Notes is 3.97% fixed for the full term of each HUD Note. The Northwood HUD Note has a principal amount of$5.0 million and matures onNovember 1, 2052 . The Greenfield HUD Note has a principal amount of$2.0 million and matures onNovember 1, 2052 . The Pavilion HUD Note has a principal amount of$0.8 million and matures onDecember 1, 2039 . Payments of principal and interest on the HUD Notes commenced onOctober 1, 2022 . Each HUD Note is secured by a Healthcare Deed to Secure Debt, Security Agreement and Assignment of Rents covering the facilities.Newpoint may declare the loans, accrued interest and any other amounts immediately due and payable upon certain customary events of default. OnSeptember 30, 2021 , the Company and theExchange Bank of Alabama executed a$5.1 million Promissory Note with a 3.95% annual fixed interest rate and maturity date ofOctober 10, 2026 (the "Coosa Credit Facility"). TheCoosa Credit Facility refinanced$5.1 million prime + 1.5% variable interest rate debt owed toMetro City Bank with a maturity date ofJanuary 31, 2036 , (the "Coosa MCB Loan"). The Coosa Credit Facility is secured by the assets of the Company's subsidiaryCoosa Nursing ADK, LLC ("Coosa") which owns the 124-bed SNF located inGlencoe, Alabama (the "Coosa Facility") and the assets of the Company's subsidiaryMeadowood Property Holdings, LLC ("Meadowood") which owns the 161-bed assisted living facility located inGlencoe, Alabama (the "Meadowood Facility"). The Company incurred approximately$0.1 million in new deferred financing fees and expensed approximately$0.1 million deferred financing fees associated with the Coosa MCB Loan. Consequently, the Company recorded a net gain of approximately$0.1 million on extinguishment of debt during the three months endedSeptember 30, 2021 , consisting of the$0.2 million gain on forgiveness of the PPP Loan partially offset by$0.1 million of expensed deferred financing fees associated with the extinguishment of the Coosa MCB Loan. Debt Modification. In conjunction with theSeptember 30, 2021 , Coosa Facility refinance, the Company and theExchange Bank of Alabama signed an agreement onOctober 1, 2021 , (the "Meadowood Credit Facility"), that extended the maturity date on the$3.5 million Meadowood Credit Facility, as amended, in senior debt other mortgage indebtedness secured by the assets ofCoosa and the assets of Meadowood, fromMay 1, 2022 , toOctober 1, 2026 . Additionally onDecember 30, 2022 , the Company extended the maturity date on approximately$0.5 million other debt fromAugust 25, 2023 , toAugust 25, 2025 (known as the "KeyBank Exit Notes"). InFebruary 2022 , the Company commenced an offer to exchange any and all of its outstanding shares of Series A Preferred Stock for newly issued shares of the Company's 12.5% Series B Cumulative Redeemable Preferred Shares. OnJuly 25, 2022 , the Company terminated such exchange offer, as a result of the failure to obtain the requisite approval from the holders of common stock. 48 --------------------------------------------------------------------------------
For further information see Note - 8 Notes Payable and Other Debt to our audited consolidated financial statements included in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report.
Changes in Operational Liquidity
Beginning in 2021, several of the Company's operators have defaulted on their contractual obligations and elected to transition the facilities back to the Company. Given the complexities in identifying and negotiating with new operators, the Company was forced to become the licensed operator of the facilities, most importantly the eight leased facilities under the "Foster Lease". Operating the facilities requires substantial working capital until the facilities can begin receiving the government reimbursements. Powder Springs Lease. InDecember 2020 , the Company entered into a lease termination agreement with two affiliates ofWellington . Following the Wellington Lease Termination, effectiveJanuary 1, 2021 , Regional leased the Powder Springs Facility toPS Operator LLC ("PS Operator"), an affiliate ofEmpire Care Center , pursuant to a sublease (the "PS Sublease"). The PS sublease contained a variable lease component. For more information, see Note 6- Leases to our audited consolidated financial statements included in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report. During the year endedDecember 31, 2021 , the Company recognized and collected$1.4 million of variable rent for the Powder Springs Facility replacing approximately$2.0 million of cash rent previously anticipated from the Wellington Tenant. During the year endedDecember 31, 2022 , the Company recognized and collected$.9 million in rent. Healthcare Services segment. As part of the Portfolio Stabilization initiative, the company took back five facilities in 2022. In addition to becoming the licensed operator, the Company is obligated to fund the working capital needs of each facility until patient reimbursement collections begin. For the years endedDecember 31, 2021 and 2022, the Healthcare Services lost$1.9 million and$1.8 million , respectively. In addition, the Account Receivable for the segment increased from$0.9 million in 2021 to$6.5 million in 2022. As described in more detail as referenced in Note 6 - Leases, to our audited consolidated financial statements included in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report, the Company terminated the master lease. As ofDecember 31 2022 , the company operated 2 facilities.
The following table presents selected data from our consolidated statement of cash flows for the periods presented:
Twelve Months Ended December 31,
(Amounts in 000's) 2022 2021
Net cash (used in) provided by operating activities
$ 4,894
Net cash used in investing activities (281 ) (123 )
Net cash used in financing activities (2,062 ) (2,415 )
Net change in cash and restricted cash (5,939 ) 2,356
Cash and restricted cash at beginning of year 9,848 7,492
Cash and restricted cash, ending $ 3,909 $ 9,848
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Year EndedDecember 31, 2022 Net cash used in operating activities for the year endedDecember 31, 2022 , was approximately$3.6 million , consisting primarily of our income from operations plus changes in working capital. The approximate$8.5 million decrease to the same period in the prior year includes an increase in accounts receivable of$6.6 million from the additional 5 facilities the company operated in 2022. Net cash used in investing activities for the year endedDecember 31, 2022 , was approximately$0.3 million . This capital expenditure was for computer hardware, software and furniture and fixtures for the additional facilities the Company operated in 2022. Net cash used in financing activities for the year endedDecember 31, 2022 , is the result of routine repayments totaling$1.6 million towards our senior debt obligations,$0.1 million repayment of theCity of Springfield, Ohio First Mortgage Revenue Series 2012 B Bonds, and approximately$1.0 million toward our professional and general liability insurance and our directors' and officers' insurance. Year EndedDecember 31, 2021 Net cash provided by operating activities for the year endedDecember 31, 2021 , was approximately$4.9 million , consisting primarily of our income from operations plus changes in working capital, and noncash charges consisting of our collection of rent arrears from the Wellington Lease Termination and income from operations less noncash charges (primarily, depreciation and amortization and lease revenue in excess of cash rent received). The approximate$2.7 million increase compared to the same period in the prior year includes a$1.5 million Medicaid overpayment that the Company expects to repay shortly and reflects the net collection of$2.5 million from the Wellington Lease Termination, approximately$0.4 million additional interest payments as result of the CARES Act interest deferrals and additional net operating outflows of$0.9 million . The net additional operating outflows include significant outflows in relation to professional and legal services to evaluate and assist with possible opportunities to improve the Company's capital structure, including on-going efforts to investigate alternatives to retire or refinance our outstanding Series A Preferred Stock. Net cash used in investing activities for the year endedDecember 31, 2021 , was approximately$0.1 million . This capital expenditure was for computer hardware, software and furniture and fixtures for the Tara Facility. Net cash used in financing activities for the year endedDecember 31, 2021 , is the result of routine repayments totaling$1.6 million towards our senior debt obligations,$0.1 million repayment of theCity of Springfield, Ohio First Mortgage Revenue Series 2012 B Bonds, and approximately$1.0 million toward our current funding of other debt for professional and general liability insurance and our directors' and officers' insurance.
Notes Payable and Other Debt
Notes payable and other debt consists of the following:
December 31,
Amounts in (000's) 2022 2021
Senior debt-guaranteed by HUD $ 29,781 $ 30,178
Senior debt-guaranteed by USDA (a) 7,525 7,824
Senior debt-guaranteed by SBA (b) 580 602
Senior debt-bonds 6,253 6,379
Senior debt-other mortgage indebtedness 8,267 8,601 Other debt
895 594
Sub Total 53,301 54,178
Deferred financing costs (1,005 ) (1,177 )
Unamortized discounts on bonds (119 ) (125 )
Notes payable and other debt $ 52,178 $ 52,876
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(a)
(b)
For a detailed description of each of the Company's debt financings, see Note 8 - Notes Payable and Other Debt to our audited consolidated financial statements included in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report.
Scheduled Minimum Debt Principal payments and Maturity payments
The schedule below summarizes the scheduled gross minimum principal payments and maturity payments as ofDecember 31, 2022 for each of the next five years and thereafter. Amounts in (000's) 2023 $ 1,778 2024 1,578 2025 2,157 2026 8,624 2027 1,425 Thereafter 37,740 Subtotal 53,302 Less: unamortized discounts on bonds (119 ) Less: deferred financing costs (1,005 ) Total notes payable and other debt $ 52,178 Debt Covenant Compliance As ofDecember 31, 2022 , the Company had approximately 16 credit related instruments outstanding that include various financial and administrative covenant requirements. Covenant requirements include, but are not limited to, fixed charge coverage ratios, debt service coverage ratios, minimum earnings before interest, taxes, depreciation, and amortization or earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs, and current ratios. Certain financial covenant requirements are based on consolidated financial measurements whereas others are based on measurements at the subsidiary level (i.e., facility, multiple facilities, or a combination of subsidiaries). The subsidiary level requirements are as follows: (i) financial covenants measured against subsidiaries of the Company; and (ii) financial covenants measured against third-party operator performance. Some covenants are based on annual financial metric measurements whereas others are based on monthly and quarterly financial metric measurements (the "Financial Covenants"). The Company routinely tracks and monitors its compliance with its covenant requirements. Included in several of the Company's loan agreements are administrative covenants requiring that a set of audited financial statements be provided to the guarantor within 90 days of the end of each fiscal year (the "Administrative Covenants"). AtDecember 31, 2022 , the Company was in compliance with the various Financial Covenants and Administrative Covenants related to all of the Company's credit facilities.
Evaluation of the Company's Ability to Continue as a Going Concern
Under the accounting guidance related to the presentation of financial
statements, the Company is required to evaluate, on a quarterly basis, whether
or not the entity's current financial condition, including its sources of
liquidity at the date that the consolidated financial statements are issued,
will enable the entity to meet its obligations as they come due within one year
of the date of the issuance of the Company's consolidated financial statements
and to make a determination as to whether or not it is probable, under the
application of this accounting guidance, that the entity will be able to
continue as a going concern. The Company's consolidated financial statements
have been presented on a
51
--------------------------------------------------------------------------------going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
In applying applicable accounting guidance, management considered the Company's current financial condition and liquidity sources, including current funds available, forecasted future cash flows, the Company's obligations due over the next twelve months as well as the Company's recurring business operating expenses. The Company is able to conclude that it is probable that the Company will be able to meet its obligations arising within one year of the date of issuance of these consolidated financial statements within the parameters set forth in the accounting guidance.
Receivables
Our operations could be adversely affected if we experience significant delays in receipt of rental income from our operators and our patient care revenues. Our future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash and accounts receivable) and current liabilities (principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on our liquidity. As ofDecember 31, 2022 , andDecember 31, 2021 , the Company reserved for approximately$1.3 million and$0.2 million , respectively, of uncollected receivables. We continually evaluate the adequacy of our bad debt reserves based on aging of older balances, payment terms and historical collection trends. Accounts receivable, net totaled$6.3 million atDecember 31, 2022 compared with$2.1 million atDecember 31, 2021 . The following table presents the Company's Accounts receivable, net of allowance for the periods presented: December 31, December 31, (Amounts in 000's) 2022 2021 Gross receivables Real Estate Services$ 1,094 $ 1,442 Healthcare Services (a) 6,493 880 Subtotal 7,587 2,322 Allowance Real Estate Services (338 ) (35 ) Healthcare Services (a) (960 ) (142 ) Subtotal (1,298 ) (177 )
Accounts receivable, net of allowance
(a)
As of
Off-Balance Sheet Arrangements
Guarantee
OnNovember 30, 2018 , the Company subleased five of the Company's facilities located inOhio (the "Aspire Facilities") to affiliates of Aspire, pursuant to those subleases (the "Aspire Subleases"), whereby the Aspire affiliates took possession of, and commenced operating, the Aspire Facilities as subtenant. The Aspire Subleases became effective onDecember 1, 2018 and are structured as triple net leases. The Aspire Facilities are comprised of: (i) a 94-bed skilled nursing facility located inCovington, Ohio (the "Covington Facility"); (ii) an 80-bed assisted living facility located inSpringfield, Ohio (the "Eaglewood ALF Facility"); (iii) a 99-bed skilled nursing facility located inSpringfield, Ohio (the "Eaglewood Care Center Facility"); (iv) a 50-bed skilled nursing facility located inGreenfield, Ohio (the "H&C of Greenfield Facility"); and (v) a 50-bed skilled nursing facility located inSidney, Ohio (the "Pavilion Care Facility"). Pursuant to the Aspire Subleases, the Company agreed to indemnify Aspire against any and all liabilities imposed on them as arising from the former operator, capped at$8.0 million . The Company has assessed the fair value of the indemnity agreements as not material to the consolidated financial statements atDecember 31, 2022 . 52 --------------------------------------------------------------------------------
Operating Leases
As ofDecember 31, 2022 , the Company leased a total of one SNF under non-cancelable leases, which has a rent escalation clause and provisions for payments of real estate taxes, insurance and maintenance costs; the SNF is leased by the Company are subleased to and operated by a third-party operator. The Company took over operations at the LaGrange andLumber City locations in May of 2022, theThomasville location in July of 2022, and the Glenvue location in August of 2022, all of which were previously subleased skilled nursing facilities.
Future minimum lease payments for each of the next five years and thereafter
ending
Future rental Accretion of Operating lease
(Amounts in 000's) payments lease liability (1) obligation
2023 $ 648 $ (54 ) $ 594
2024 633 (73 ) 560
2025 645 (118 ) 527
2026 658 (162 ) 496
2027 671 (203 ) 468
Thereafter 915 (334 ) 581
Total $ 4,170 $ (944 ) $ 3,226
(1)Weighted average discount rate 7.98%
For a further description of the Company's operating leases, see Note 6 - Leases to our audited consolidated financial statements included in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report.
Leased and Subleased Facilities to Third-Party Operators
As ofDecember 31, 2022 , eleven facilities (ten owned by us and one leased to us) are leased or subleased on a triple net basis, meaning that the lessee (i.e., the third-party operator of the property, or the Company with respect to the operated facilities) is obligated under the lease or sublease, as applicable, for all liabilities of the property in respect to insurance, taxes and facility maintenance, as well as the lease or sublease payments, as applicable.
Future minimum lease receivables for each of the next five years and thereafter
ending
(Amounts in 000's)
2023 $ 6,256
2024 6,187
2025 6,034
2026 5,362
2027 5,445
Thereafter 11,605
Total $ 40,888
The following is a summary of the Company's leases to third-parties and which
comprise the future minimum lease receivables of the Company. The terms of each
lease are structured as "triple-net" leases. Each lease contains specific rent
escalation amounts ranging from 1.0% to 3.0% annually. Further, each lease has
one or more renewal options. For those facilities subleased by the Company, the
renewal option in the sublease agreement is dependent on the Company's renewal
of its lease agreement.
53
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Expiration 2023 Cash
Facility Name (5) Operator Affiliation (1) Date Annual Rent
(Thousands)
Owned
Eaglewood Village Aspire Regional Partners 11/30/2028 630
Eaglewood Care Center Aspire Regional Partners 11/30/2028 813
Hearth & Care of Greenfield Aspire Regional Partners 11/30/2023 311
The Pavilion Care Center Aspire Regional Partners 11/30/2028 340
Autumn Breeze Healthcare Center C.R. Management 9/30/2025 962
Coosa Valley Health & Rehab C.R. Management 8/31/2030 1,072
Georgetown Healthcare & Oak Hollow Health Care
Rehabilitation Management 3/31/2030 337
Mountain Trace Rehabilitation
and Nursing Center Vero Health Management 2/28/2029 528
Management 3/31/2030 450
Subtotal Owned Facilities (9)
5,443
Leased
Covington Care Center Aspire Regional Partners 11/30/2028
813
Subtotal Leased Facilities (1) $ 813 Total (10)$ 6,256 (1) Represents the number of facilities which are leased or subleased to separate tenants, which tenants are affiliates of the entity named in the table above. See "Portfolio of Healthcare Investments" in Part I, Item 1, "Business" in this Annual Report. For a detailed description of each of the Company's leases, see Note 6- Leases and Note 2- Liquidity to our audited consolidated financial statements included in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report.
Professional and General Liability
As of the date of filing this Annual Report, the Company is a defendant in a total of 10 professional and general liability actions. The Company has one legacy action from prior to the Transition and is a named party in 9 actions related directly to patient care that our current or prior tenants provided to their patients. For further information, see below and Note 15 - Subsequent Events to our audited consolidated financial statements included in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report. As of the date of filing this Annual Report, the Company is a defendant in one professional and general liability action commenced on behalf of one of our former patients who received care at one of our facilities prior to the Transition. The plaintiff in this action alleges negligence due to failure to provide adequate and competent staff resulting in injuries, pain and suffering, mental anguish and malnutrition and seeks unspecified actual and compensatory damages, and unspecified punitive damages. This action is covered by insurance, except that any punitive damages awarded would be excluded from coverage. As of the date of filing this Annual Report, the Company is also a defendant in 9 professional and general liability actions which set forth claims relating to time periods after the Transition, on behalf of former patients of our current or prior tenants. These actions generally seek unspecified compensatory and punitive damages for former patients who were allegedly injured or died due to professional negligence or understaffing at the applicable facility operated by our tenants. These actions on behalf of former patients of our current or prior tenants all relate to events which occurred after the Company transitioned the operations of the facilities in question to a third-party operator (and of which four such actions relate to events which occurred after the Company sold such facilities) and are subject to such operators' indemnification obligations in favor of the Company.
The Company maintains insurance for professional and general liability claims
for its Healthcare Services segment however, for claims prior to
54
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claims since it discontinued its healthcare operations in connection with the
Transition. The Company established a self-insurance reserve for these
professional and general liability claims, included within "Accrued expenses" in
the Company's audited consolidated balance sheets of $0.1 million and $0.2
million at December 31, 2022 , and December 31, 2021 , respectively. Additionally
at December 31, 2021 and December 31, 2020 , approximately $0.1 million and $0.1
million was reserved for settlement amounts in "Accounts payable" in the
Company's audited consolidated balance sheets.
Accordingly, the self-insurance reserve accrual primarily reflects the Company's
estimate of settlement amounts for the pending actions, as appropriate and legal
costs of settling or litigating the pending actions, as applicable. These
amounts are expected to be paid over time as the legal proceedings progress. The
duration of such legal proceedings could be greater than one year subsequent to
the year ended December 31, 2022 ; however management cannot reliably estimate
the exact timing of payments.
See Note 13 - Commitments and Contingencies to our audited consolidated financial statements included in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report.
Critical Accounting Policies
We prepare our financial statements in accordance withU.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-K and Rule 8-03 of Article 8 of Regulation S-X. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, we review our judgments and estimates, including, but not limited to, those related to revenue recognition, doubtful accounts, income taxes, stock compensation, intangible assets, extinguishment of debt, self-insurance reserve and loss contingencies. We base our estimates on historical experience, business knowledge and on various other assumptions that we believe to be reasonable under the circumstances at the time. Actual results may vary from our estimates. These estimates are evaluated by management and revised as circumstances change. For a discussion of our critical accounting policies, see Note 1 - Summary of Significant Accounting Policies to our audited consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data", in this Annual Report.
Revenue Recognition and Allowances
Patient Care Revenue. TheFinancial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606") requires a company to recognize revenue when the company transfers control of promised goods and services to a customer. Revenue is recognized in an amount that reflects the consideration to which a company expects to receive in exchange for such goods and services. Revenue from our new Healthcare Services business segment is derived from services rendered to patients in the Tara Facility. The Company receives payments from the following sources for services rendered in our facilities: (i) the federal government under the Medicare program administered by CMS; (ii) state governments under their respective Medicaid and similar programs; (iii) commercial insurers; and (iv) individual patients and clients. The vast majority (greater than 90%) of the revenue the Company has recognized is from government sources. The Company determines the transaction price based on established billing rates reduced by contractual adjustments provided to third-party payors, discounts provided to uninsured patients and other price concessions. Contractual adjustments and discounts are based on contractual agreements, discount policies and historical experience. The Company recognizes revenue at the amount that reflects the consideration the Company expects to receive in exchange for the services provided. These amounts are due from residents or third-party payors and include variable consideration for retroactive adjustments from estimated reimbursements, if any, under reimbursement programs. Performance obligations, such as providing room and board, wound care, intravenous drug therapy, physical therapy, and quality of life activities amongst others, are determined based on the nature of the services provided. Revenue is recognized as performance obligations are satisfied. Estimated uncollectable amounts due from patients are generally considered implicit price concessions that are a direct reduction to net patient care revenues.Triple-Net Leased Properties .Triple-Net Leased Properties . The Company's triple-net leases provide for periodic and determinable increases in rent. The Company recognizes rental revenues under these leases on a straight-line basis over the applicable lease term when collectability is probable. FASB Accounting Standards Update ("ASU") 55 -------------------------------------------------------------------------------- 2014-09, Revenue from Contracts with Customers, as codified in ASC 606, does not apply to rental revenues, which are the Company's primary source of revenue. Recognizing rental income on a straight-line basis generally results in recognized revenues during the first half of a lease term exceeding the cash amounts contractually due from our tenants, creating a straight-line rent receivable that is included in straight-line rent receivable on our consolidated balance sheets. In the event the Company cannot reasonably estimate the future collection of rent from one or more tenant(s) of the Company's facilities, rental income for the affected facilities is recognized only upon cash collection, and any accumulated straight-line rent receivable is expensed in the period in which the Company deems rent collection to no longer be probable. Accordingly, rental revenues were recorded on a cash basis for one facility inAlabama for the month ofDecember 2021 and two facilities inGeorgia for the fourth quarter of 2020, (until operator or Company management transition onJanuary 1, 2021 , for both properties. For additional information with respect to such facilities, see Note 6 - Leases to our audited consolidated financial statements in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report. Management Fee Revenues and Other Revenues. OnJanuary 1, 2018 , the Company adopted ASU 2014-09, Revenue from Contracts with Customers, as codified in ASC 606, which requires a company to recognize revenue when the company transfers control of promised goods and services to a customer. Revenue is recognized in an amount that reflects the consideration to which a company expects to receive in exchange for such goods and services. The Company recognizes management fee revenues as services are provided. The Company has one contract to manage three facilities (the "Management Contract"), with payment for each month of service generally received in full on a monthly basis. The maximum penalty for service contract nonperformance under the Management Contract is$50,000 per year, payable after the end of the year. Further, the Company recognizes interest income from loans and investments, using the effective interest method when collectability is probable. The Company applies the effective interest method on a loan-by-loan basis. Allowances. The Company assesses the collectability of its rent receivables, including straight-line rent receivables and working capital loans to tenants. The Company bases its assessment of the collectability of rent receivables and working capital loans to tenants on several factors, including payment history, the financial strength of the tenant and any guarantors, the value of the underlying collateral, and current economic conditions. If the Company's evaluation of these factors indicates it is probable that the Company will be unable to receive the rent payments or payments on a working capital loan, then the Company provides a reserve against the recognized straight-line rent receivable asset or working capital loan for the portion that we estimate may not be recovered. Payments received on impaired loans are applied against the allowance. If the Company changes its assumptions or estimates regarding the collectability of future rent payments required by a lease or required from a working capital loan to a tenant, then the Company may adjust its reserve to increase or reduce the rental revenue or interest revenue from working capital loans to tenants recognized in the period the Company makes such change in its assumptions or estimates. The Company has reserved for approximately 1.5% of our patient care receivables based on the history provided byVero Health for private payors and continues to assess the adequacy of such reserve.
As of
Leasing. OnJanuary 1, 2019 , the Company adopted Accounting Standards Update ("ASU")ASU 2016-02, Leases, as codified in ASC 842, using the non-comparative transition option pursuant to ASU 2018-11. The Company recognized both right of use assets and lease liabilities for leases in which we lease land, real property or other equipment, electing the practical expedient to maintain the prior operating lease classification. EffectiveJanuary 1, 2019 , the Company assesses any new contracts or modification of contracts in accordance with ASC 842 to determine the existence of a lease and its classification. We are reporting revenues and expenses for real estate taxes and insurance where the lessee has not made those payments directly to a third party in accordance with their respective leases with us. Additionally, we now expense certain leasing costs, other than leasing commissions, as they are incurred. Current GAAP provides for the deferral and amortization of such costs over the applicable lease term. Adoption of ASU 2016-02 has not had a material effect on the Company's consolidated financial statements, other than the initial balance sheet impact of recognizing the right-of-use assets and the right-of-use lease liabilities. Upon adoption, we recognized operating lease assets of$39.8 million on our consolidated balance sheet for the period endedMarch 31, 2019 , which represents the present value of minimum lease payments associated with such leases. Also, upon adoption, we recognized operating lease liabilities of$41.5 million on our consolidated balance sheet for the period endedMarch 31, 2019 . The present value of minimum lease payments was calculated on each lease using a 56 -------------------------------------------------------------------------------- discount rate that approximated our incremental borrowing rate and the current lease term and upon adoption we utilized a discount rate of 7.98% for the Company's leases. See Note 1 - Summary of Significant Accounting Policies and Note 6 - Leases to our audited consolidated financial statements in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report.
Asset Impairment
We review the carrying value of long-lived assets that are held and used in our operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is determined based upon expected undiscounted future net cash flows from the operations to which the assets relate, utilizing management's best estimate, assumptions, and projections at the time. If the carrying value is determined to be unrecoverable from future operating cash flows, the asset is deemed impaired and an impairment loss would be recognized to the extent the carrying value exceeded the estimated fair value of the asset. We estimate the fair value of assets based on the estimated future discounted cash flows of the asset. Management has evaluated its long-lived assets and identified no material asset impairment during the years endedDecember 31, 2022 and 2021. We test indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable.Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations.Goodwill is subject to annual testing for impairment. In addition, goodwill is tested for impairment if events occur or circumstances change that would reduce the fair value of a facility below its carrying amount. We perform annual testing for impairment during the fourth quarter of each year (see Note 5 - Intangible Assets andGoodwill to our audited consolidated financial statements in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report).
Stock Based Compensation
The Company follows the provisions of ASC Topic 718 "Compensation - Stock Compensation", which requires the use of the fair-value based method to determine compensation for all arrangements under which employees, non-employees, and others receive shares of stock or equity instruments (options, warrants or restricted shares). All awards are amortized on a straight-line basis over their vesting terms.
Self-Insurance Reserve
The Company maintains insurance for professional and general liability claims for its Healthcare Services segment, which includes the Tara Facility or any other facility, such as the Meadowood Facility which the Company is likely to operate, however for claims prior toJanuary 1, 2020 , the Company is self-insured against professional and general liability claims since it discontinued its healthcare operations in connection with the Transition. The Company evaluates quarterly the adequacy of its self-insurance reserve based on a number of factors, including: (i) the number of actions pending and the relief sought; (ii) analyses provided by defense counsel, medical experts or other information which comes to light during discovery; (iii) the legal fees and other expenses anticipated to be incurred in defending the actions; (iv) the status and likely success of any mediation or settlement discussions, including estimated settlement amounts and legal fees and other expenses anticipated to be incurred in such settlement, as applicable; and (v) the venues in which the actions have been filed or will be adjudicated. The Company believes that most of the professional and general liability actions are defensible and intends to defend them through final judgment unless settlement is more advantageous to the Company. Accordingly, the self-insurance reserve reflects the Company's estimate of settlement amounts for the pending actions, if applicable, and legal costs of settling or litigating the pending actions, as applicable. Because the self-insurance reserve is based on estimates, the amount of the self-insurance reserve may not be sufficient to cover the settlement amounts actually incurred in settling the pending actions, or the legal costs actually incurred in settling or litigating the pending actions. See Note 7 - Accrued Expenses and Note 13 - Commitments and Contingencies to our audited consolidated financial statements in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report. Income Taxes As required by ASC Topic 740, "Income Taxes", we established deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at tax rates in effect 57
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when such temporary differences are expected to reverse. When necessary, we record a valuation allowance to reduce our net deferred tax assets to the amount that is more likely than not to be realized. AtDecember 31, 2022 , the Company has a valuation allowance of approximately$20.2 million . In future periods, we will continue to assess the need for and adequacy of the remaining valuation allowance. ASC 740 provides information and procedures for financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. Among other changes, the Tax Reform Act reduced the US federal corporate tax rate from 35% to 21% beginning in 2018. As a result of the Tax Reform Act, net operating loss ("NOL") carry forwards generated in tax years 2018 and forward have an indefinite life. For this reason, the Company has taken the position that the deferred tax liability related to the indefinite lived intangibles can be used to support an equal amount of the deferred tax asset related to the 2018 NOL carry forward generated. In determining the need for a valuation allowance, the annual income tax rate, or the need for and magnitude of liabilities for uncertain tax positions, we make certain estimates and assumptions. These estimates and assumptions are based on, among other things, knowledge of operations, markets, historical trends and likely future changes and, when appropriate, the opinions of advisors with knowledge and expertise in certain fields. Due to certain risks associated with our estimates and assumptions, actual results could differ. Judgment is required in evaluating uncertain tax positions. The Company determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the "more-likely-than-not recognition threshold" it is measured to determine the amount of benefit to recognize in the financial statements. The Company classifies unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as liabilities in the consolidated balance sheets. As ofDecember 31, 2022 , the Company has a full valuation allowance on all deferred tax balances. The Company is subject to income taxes in theU.S. and numerous state and local jurisdictions. In general, the Company's tax returns filed for the 2019 through 2022 tax years are still subject to potential examination by taxing authorities. To the Company's knowledge, the Company is not currently under examination by any major income tax jurisdiction. Further information required by this Item is provided in Note 1 - Summary of Significant Accounting Policies to our audited consolidated financial statements included in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report.
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