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DIVERSICARE HEALTHCARE SERVICES, INC. – 10-Q – 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 inAlabama ,Indiana ,Kansas ,Mississippi ,Missouri ,Ohio ,Tennessee , andTexas . The Company's operating results also include the results of discontinued operations in the state ofKentucky that have been reclassified on the face of the financial statements to reflect the discontinued status of these operations for all periods presented. As ofSeptember 30, 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. As previously announced, onAugust 26, 2021 , the Company, Parent, and Merger Sub, entered into an agreement and plan of merger, pursuant to which Merger Sub will be merged with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Parent. Subject to the terms and conditions set forth in the merger agreement, at the effective time of the Merger, each share of Company common stock issued and outstanding immediately prior to the effective time of the Merger (other than (i) shares of Company common stock held by the Company as treasury stock or owned by Parent or Merger Sub and (ii) shares of Company common stock held by stockholders who have properly and validly exercised their statutory rights of appraisal in respect of such shares) will be automatically converted into the right to receive cash in an amount equal to$10.10 per share, net of applicable withholding taxes and without interest thereon. The Company's board of directors approved the Merger and directed the Merger be submitted to the stockholders of the Company for adoption. A special meeting of the stockholders will be held onNovember 18, 2021 to vote on the proposal to adopt the Merger. The Merger requires the approval of a majority of the Company's stockholders and is expected to be completed in the fourth quarter of 2021, subject to such approval by the Company's stockholders. For more information on the Merger, refer to the Company's current report on Form 8-K filed August 27, 2021. In connection with the execution of the merger agreement, Parent entered into a voting and support agreement with the Company's directors, who collectively hold approximately 33.4% of the outstanding shares of Company common stock. The voting and support agreement provides that, among other things, each of the stockholders party thereto will vote or cause to be voted, all of the shares of Company common stock beneficially owned by such stockholder (i) in favor of the stockholder proposals submitted at the special meeting of the stockholders, including the adoption of the merger agreement, and (ii) against any alternative acquisition proposal and certain other actions, including actions that would reasonably be expected to result in a material breach of the merger agreement or prevent or materially impair or delay consummation of the Merger prior to the End Date. The foregoing description of the voting and support agreement does not purport to be complete and is qualified in its entirety by reference to the voting and support agreement, which is filed as Exhibit 10.1 to the Company's current report on Form 8-K filedAugust 27, 2021 . 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 27 -------------------------------------------------------------------------------- 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 counties with community transmission levels above a certain threshold to test all staff at specific routine intervals. 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. There have been cases of COVID-19 at 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 theCDC 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$6.0 million of labor expense and$1.2 million 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 endedSeptember 30, 2021 . The Company incurred an additional$19.8 million of labor expense and$5.7 million for testing and the increased costs of personal protective equipment, food and infection control supplies related to the COVID-19 pandemic for the nine month period endedSeptember 30, 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 theCDC , 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. The PHSSEF payments are not required to be repaid provided that the recipient has sufficient COVD-19 attributable expenses and lost revenues during the applicable period for using the funds, which depends on the time period during which the funds were received, and complies with applicable terms and conditions. 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 authorize additional relief funding to skilled nursing facilities and nursing homes in the form of Nursing Home Infection Control distributions, with a fixedten 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 throughDecember 2020 , with the total available bonus payment for each performance period determined in part based on data reported viaCASPER . The terms and conditions for this distribution limit use of payments to certain infection control expenses. As ofSeptember 30, 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 additional payments as ofSeptember 30, 2021 . In addition, we also recently applied for funding under Phase 4 of the PHSSEF and the American Rescue Plan Rural funding program; however, we do not know whether we will ultimately receive additional payments under these distributions. Recipients of more thanten thousand dollars in PHSSEF funds, including Nursing Home Infection Control distributions, are required to submit reports to HHS that include information about their expenses and lost revenues and use of the PHSSEF funds. Reports are to be submitted through an online portal that opened onJuly 1, 2021 . The timelines for reporting on the use 28 -------------------------------------------------------------------------------- of PHSSEF funds depend on the time periods during which the funds were received, such that a series of reports will be required. We have reported on our use of the PHSSEF funds we received betweenApril 10, 2020 andJune 30, 2020 in accordance with the Post-Payment Notices of Reporting Requirements guidance issued by HHS. 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. As ofSeptember 30, 2021 , the Company has utilized the funds it received from the PHSSEF to compensate for COVID-19 attributable lost revenues and pay for permissible expenses. The Company currently anticipates, but cannot guarantee, that it will be able to demonstrate sufficient healthcare related lost revenues, COVID-19 attributable expenses, and infection control expenses to retain the PHSSEF payments andNursing Home Infection Control distributions it has received to date. The Company does not yet know the full extent of its COVID-19 attributable expenses and lost revenues. 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. 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 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 include other provisions offering financial relief, for example suspending the Medicare sequestration payment adjustment fromMay 1, 2020 throughDecember 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). However, while the ARPA provides funding to healthcare providers, it also 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% in FY 2022, to begin to take effect inJanuary 2022 , in addition to the existing sequestration requirements of the Budget Control Act of 2011. 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, among other factors relating to the 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 endedSeptember 30, 2021 and 2020 was 14.7% and 16.5%, respectively. The Company's skilled mix for the nine months endedSeptember 30, 2021 and 2020 was 15.9% and 15.0%, respectively. The change in skilled mix is due in part to the impact of COVID-19 on our patients and residents and the temporary waiver of certain Medicare program requirements, which has allowed Medicare beneficiaries that require a new or changed skill level of care to receive that care under Medicare Part A from a skilled nursing facility without satisfying the standard hospital stay requirement (sometimes referred to as "skilled in place"). 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. 29
-------------------------------------------------------------------------------- Completing strategic transactions and other business developments: Our strategic operating initiatives include strategic acquisitions and divestitures. We consider opportunities to acquire or lease new centers within our existing geographic areas of operation. We also perform 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. OnDecember 1, 2020 , the Company entered into an agreement with Omega Healthcare Investors ("Omega") to transfer operations of the facility located inFlorida to another operator. The agreement effectively amended the Master Lease Agreement between the Company and Omega, datedOctober 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 theFlorida facility. EffectiveNovember 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. To allow one of the Company's skilled nursing centers to participate in the Texas Quality Incentive Program ("QIPP"), the Company entered into a transaction duringApril 2021 with aTexas medical district. QIPP provides supplemental Medicaid payments for skilled nursing centers that achieve certain quality measures. The Company currently has twelve of itsTexas skilled nursing centers participating in the QIPP. To allow five of these centers to meet the QIPP participation requirements, the Company entered into a transaction with aTexas 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. 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 federal and state stimulus funds and grant funds from states that were recognized during the period. 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 for the fiscal year endedDecember 31, 2020 . 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 aHealth 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 ofVeterans Administration benefits.Veterans Administration payments are made pursuant to renewable contracts negotiated with these payors. The Company recognized$4.5 million and$0.5 million ofMedicaid and Hospice stimulus dollars, respectively, for the three month period endedSeptember 30, 2021 that are reflected as patient revenues from Medicaid and Private Pay and Other, respectively, in the Company's results of operations. The Company recognized$13.8 million and$1.1 million ofMedicaid and Hospice stimulus dollars, respectively, for the nine month period endedSeptember 30, 2021 that are reflected as patient revenues from Medicaid and Private Pay and Other 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 30 --------------------------------------------------------------------------------
summarizes revenue from contracts with customers by payor source from continuing
operations for the periods presented (dollar amounts in thousands).
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Medicaid $ 55,554 48.0 % $ 55,844 47.3 % $ 157,274 46.2 % $ 164,335 46.1 %
Medicare 19,682 17.0 % 24,374 20.7 % 62,870 18.5 % 67,470 18.9 %
Managed Care 13,033 11.3 % 11,967 10.1 % 38,804 11.4 % 36,918 10.4 %
Private Pay and other 27,467 23.7 % 25,780 21.9 % 81,418 23.9 % 87,472 24.6 %
Total $ 115,736 100.0 % $ 117,965 100.0 % $ 340,366 100.0 % $ 356,195 100.0 %
The following table sets forth average daily skilled nursing census by primary
payor source for our continuing operations for the periods presented:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Medicaid 3,373 69.2 % 3,240 66.3 % 3,278 67.9 % 3,524 67.3 %
Medicare 436 8.9 % 570 11.7 % 491 10.2 % 539 10.3 %
Managed Care 281 5.8 % 237 4.8 % 276 5.7 % 247 4.7 %
Private Pay and other 783 16.1 % 843 17.2 % 783 16.2 % 927 17.7 %
Total 4,873 100.0 % 4,890 100.0 % 4,828 100.0 % 5,237 100.0 %
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.
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, 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. This change resulted in legal challenges to the constitutionality of
the individual mandate and validity of the Affordable Care Act as a whole.
However, in June 2021 , the U.S. Supreme Court determined that the plaintiffs
lacked standing, allowing the law to remain in place.
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
31
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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.
CMS issues annual updates to Medicare payment policies and rates under the
skilled nursing facility prospective payment system. On August 5, 2020 , CMS
published 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 increased by an estimated 2.2% based on a market
basket update of 2.2%, adjusted by a 0.0 percentage point multifactor
productivity adjustment. On August 4, 2021 , CMS published a final ruling
outlining Medicare payment rates for skilled nursing facilities for federal
fiscal year 2022. Effective October 1, 2021 , payments to skilled nursing
facilities increased by 1.2% based on a market basket update of 2.7%, a negative
0.7 percentage point multifactor productivity adjustment, and other changes to
payment policies. In addition, skilled nursing facilities are required to report
quality data to CMS or be subject to a 2 percentage point reduction to the
annual market basket update.
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 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, such
as guidance on prioritizing or suspending certain nursing home surveys. Some of
these measures have been lifted, and many states have resumed routine oversight
and survey activities. However, due to these changes and their impact on data,
CMS adjusted 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, potential staffing shortages, and
vaccination rates for staff and residents.
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
September 30, 2021 , summarized by the period in which payment is due, as follows
(dollar amounts in thousands):
Less than 1 to 3 3 to 5 After
Contractual Obligations Total 1 year Years Years 5 Years
Long-term debt obligations (1)
Settlement obligations (2)
3,254 2,754 500 - - Settlement of civil investigative demand (3) 8,529 1,180 4,281 3,068 - Operating leases (4) 367,067 51,893 106,002 107,896 101,276 Required capital expenditures under operating leases (5) 13,726 1,893 3,788 3,788 4,257 Total$ 460,923 $ 62,778 $ 177,860 $ 114,752 $ 105,533 (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$1.9 million betweenDecember 31, 2020 andSeptember 30, 2021 . See Note 6, "Long-Term Debt" to the interim consolidated financial statements included in this report for additional information. 32 -------------------------------------------------------------------------------- (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 theU.S. Department of Justice and theState of Tennessee . See additional description of our contingencies in Note 9, "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$38.2 million betweenDecember 31, 2020 andSeptember 30, 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$1.8 million betweenDecember 31, 2020 andSeptember 30, 2021 . Employment Agreements We have employment agreements with certain members of management that provide for cash severance payments 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 for cash severance is approximately$2.7 million (exclusive of continued benefits and vested equity grants) as ofSeptember 30, 2021 . The terms of such agreements are for one year and automatically renew for one year if not terminated by us or the employee. Results of Continuing Operations The following tables present the unaudited interim consolidated statements of operations and related data for the three and nine month periods endedSeptember 30, 2021 and 2020: (in thousands) Three Months Ended September 30, 2021 2020 Change % PATIENT REVENUES, NET$ 115,736 $ 117,965 $ (2,229) (1.9) % OTHER OPERATING INCOME 2,344 9,563 (7,219) (75.5) % EXPENSES: Operating 95,192 98,706 (3,514) (3.6) % Lease and rent expense 13,263 13,524 (261) (1.9) % Professional liability 1,814 2,249 (435) (19.3) % General and administrative 7,515 6,487 1,028 15.8 % Depreciation and amortization 2,365 2,098 267 12.7 % Total expenses 120,149 123,064 (2,915) (2.4) % OPERATING (LOSS) INCOME (2,069) 4,464 (6,533) (146.3) % OTHER INCOME (EXPENSE): Other income 35 90 (55) (61.1) % Interest expense, net (1,104) (1,172) 68 5.8 % Total other expenses (1,069) (1,082) 13 1.2 % (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (3,138) 3,382 (6,520) (192.8) % BENEFIT (PROVISION) FOR INCOME TAXES 279 (209) 488 233.5 % (LOSS) INCOME FROM CONTINUING OPERATIONS$ (2,859) $ 3,173 $ (6,032) (190.1)% 33
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(in thousands) Nine Months Ended September 30,
2021 2020 Change %
PATIENT REVENUES, NET $ 340,366 $ 356,195 $ (15,829) (4.4) %
OTHER OPERATING INCOME 22,212 14,711 7,501 51.0 %
EXPENSES:
Operating 283,619 289,340 (5,721) (2.0) %
Lease and rent expense 39,776 40,560 (784) (1.9) %
Professional liability 5,381 6,202 (821) (13.2) %
General and administrative 21,256 20,125 1,131 5.6 %
Depreciation and amortization 7,034 6,663 371 5.6 %
Total expenses 357,066 362,890 (5,824) (1.6) %
OPERATING INCOME 5,512 8,016 (2,504) (31.2) %
OTHER INCOME (EXPENSE):
Other income 248 614 (366) (59.6) %
Interest expense, net (3,213) (3,841) 628 16.3 %
Total other expenses (2,965) (3,227) 262 8.1 %
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES 2,547 4,789 (2,242) (46.8) %
PROVISION FOR INCOME TAXES (418) (287) (131) N/M
INCOME FROM CONTINUING OPERATIONS $ 2,129 $ 4,502 $ (2,373) (52.7) %
N/M = Not Meaningful
Percentage of Total Patient Revenues Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
PATIENT REVENUES, NET 100.0 % 100.0 % 100.0 % 100.0 %
OTHER OPERATING INCOME 2.0 8.1 6.5 4.1
EXPENSES:
Operating 82.2 83.7 83.3 81.2
Lease and rent expense 11.5 11.5 11.7 11.4
Professional liability 1.6 1.9 1.6 1.7
General and administrative 6.5 5.5 6.2 5.6
Depreciation and amortization 2.0 1.8 2.1 1.9
Total expenses 103.8 104.4 104.9 101.8
OPERATING INCOME (LOSS) (1.8) 3.7 1.6 2.3
OTHER INCOME (EXPENSE):
Other income - 0.1 0.1 0.2
Interest expense, net (1.0) (1.0) (0.9) (1.1)
Total other expenses (1.0) (0.9) (0.8) (0.9)
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (2.8) 2.8 0.8 1.4
BENEFIT (PROVISION) FOR INCOME TAXES 0.2 (0.2) (0.1) (0.1)
INCOME (LOSS) FROM CONTINUING OPERATIONS (2.6) % 2.6 % 0.7 % 1.3 %
34
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Three Months Ended September 30, 2021 Compared To Three Months Ended
September 30, 2020
Patient Revenues
Patient revenues were $115.7 million and $118.0 million for the three months
ended September 30, 2021 and 2020, respectively, a decrease of $2.3 million .
Our Medicaid rate for the third quarter of 2021 increased 2.8% resulting in a
revenue increase of $1.6 million . Conversely, our Managed care rate for the
third quarter of 2021 decreased 4.9%, resulting in reduced revenue of $0.5
million . Our Medicaid and Managed care census for the third quarter of 2021
increased 4.1% and 18.7%, respectively, resulting in increased revenue of $2.2
million and $1.8 million , respectively. Conversely, our Medicare, Hospice and
Private average daily census for the third quarter of 2021 decreased 23.5%,
8.7%, and 10.2%, respectively, resulting in reduced revenue of $6.2 million ,
$0.7 million , and $0.7 million , respectively. The decline in census for the
third quarter of 2021 was mainly due to the impact of the COVID-19 pandemic. We
experienced an increase in Veterans rate and census of $0.4 million and $0.5
million , respectively, due to a new Veterans contract and related initiative. We
recognized $1.6 million less Medicaid and Hospice state stimulus funds during
the third quarter of 2021 compared to the third quarter of 2020.
The following table summarizes key revenue and census statistics for continuing
operations for each period:
Three Months Ended September 30,
2021 2020
Skilled nursing occupancy 67.2 %
66.7 %
As a percent of total census:
Medicare census 8.9 % 11.7 %
Medicaid census 69.2 % 66.3 %
Managed Care census 5.8 % 4.8 %
As a percent of total revenues:
Medicare revenues 17.0 % 20.7 %
Medicaid revenues 48.0 % 47.3 %
Managed Care revenues 11.3 % 10.1 %
*Average rate per day:
Medicare $ 506.71 $ 503.75
Medicaid $ 188.45 $ 183.27
Managed Care $ 409.75 $ 430.88
*Excludes COVID-19 federal and state stimulus payments
Other Operating Income SinceJanuary 1, 2020 , we have received$51.6 million from the PHSSEF. We recognized$2.3 million and$9.6 million of the funds for the three months endedSeptember 30, 2021 and 2020, respectively, which is classified as "Other Operating Income" in the Company's results of operations. The Medicare stimulus funds we recognized during the quarter were used to offset healthcare-related expenses 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 decreased in the third quarter of 2021 to$95.2 million from$98.7 million in the third quarter of 2020, a decrease of$3.5 million . Operating expense decreased as a percentage of patient revenues to 82.2% for the third quarter of 2021 as compared to 83.7% for the third quarter of 2020. We incurred incremental healthcare-related expenses attributable to COVID-19 of$7.2 million for the three months endedSeptember 30, 2021 , which is a decrease of$5.5 million compared to the third quarter of 2020. Such expenses included increased labor expenses, testing and the increased costs of personal protective equipment, food and infection control supplies. 35 -------------------------------------------------------------------------------- Lease Expense Lease expense in the third quarter of 2021 decreased to$13.3 million as compared to$13.5 million in the third quarter of 2020, a decrease of$0.2 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 inFlorida . Professional Liability Professional liability expense was$1.8 million and$2.2 million in the third 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 theState of Kentucky , were$1.6 million and$1.8 million for the third 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 was$7.5 million in the third quarter of 2021 and$6.5 million in the third quarter of 2020, an increase of$1.0 million . Increased legal and consulting fees, mostly attributable to the merger transaction, of$1.0 million was the primary driver for the fluctuation. Depreciation and Amortization Depreciation and amortization expense was$2.4 million in the third quarter of 2021 and$2.1 million in the third quarter of 2020, an increase of$0.3 million . Interest Expense, Net Interest expense was$1.1 million in the third quarter of 2021 and$1.2 million in the third quarter of 2020, a decrease of$0.1 million . (Loss) Income from Continuing Operations before Income Taxes; (Loss) Income from Continuing Operations per Common Share As a result of the above, continuing operations reported a loss of$(3.1) million and income of$3.4 million before income taxes for the third quarters of 2021 and 2020, respectively. The basic and diluted loss per common share from continuing operations were both$(0.43) for the third quarter of 2021, compared to both basic and diluted income per common share from continuing operations of$0.48 in the third quarter of 2020. COVID-19 Impact on Continuing Operations There have been 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. 36 -------------------------------------------------------------------------------- Nine Months EndedSeptember 30, 2021 Compared To Nine Months EndedSeptember 30, 2020 Patient Revenues Patient revenues were$340.4 million and$356.2 million for the nine months endedSeptember 30, 2021 and 2020, respectively, a decrease of$15.8 million . Our Medicaid and Medicare rates for the nine months endedSeptember 30, 2021 increased 1.8% and 0.8%, respectively, resulting in revenue increases of$2.9 million and$0.6 million , respectively. Our Managed care census for the nine months endedSeptember 30, 2021 increased 11.7%, resulting in increased revenue of$3.3 million . Conversely, our Medicaid, Medicare,Private and Hospice average daily census for the nine months endedSeptember 30, 2021 decreased 6.9%, 9.3%, 16.1% and 16.9%, respectively, resulting in reduced revenue of$12.2 million ,$6.8 million ,$3.5 million and$4.4 million , respectively. The decline in census for the nine months endedSeptember 30, 2021 was mainly due to the impact of the COVID-19 pandemic. We saw an increase in Veterans rate and census of$1.3 million and$0.5 million , respectively, due to a new Veterans contract and related initiative. We recognized$3.2 million additionalMedicaid and Hospice state stimulus funds compared to the nine months endedSeptember 30, 2020 . The QIPP and Intergovernmental Transfer ("IGT") programs resulted in$1.7 million of additional revenues for the nine months endedSeptember 30, 2021 . One less day of revenues for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 resulted in$1.2 million less revenue. The following table summarizes key revenue and census statistics for continuing operations for each period: Nine Months EndedSeptember 30, 2021 2020
Skilled nursing occupancy 66.6 %
71.6 %
As a percent of total census:
Medicare census 10.2 % 10.3 %
Medicaid census 67.9 % 67.3 %
Managed Care census 5.7 % 4.7 %
As a percent of total revenues:
Medicare revenues 18.5 % 18.9 %
Medicaid revenues 46.2 % 46.1 %
Managed Care revenues 11.4 % 10.4 %
*Average rate per day:
Medicare $ 499.95 $ 495.74
Medicaid $ 185.20 $ 181.99
Managed Care $ 413.66 $ 414.42
*Excludes COVID-19 federal and state stimulus payments
Other Operating Income We recognized$21.3 million and$14.7 million of provider relief funds during the nine months endedSeptember 30, 2021 and 2020, respectively, which is classified as "Other Operating Income" in the Company's results of operations. We also recognized$0.9 million of grant funds from states during the nine months endedSeptember 30, 2021 , which is included in "Other Operating Income" in the Company's results of operation for the nine months endedSeptember 30, 2021 . The Medicare stimulus funds that we recognized during the nine months endedSeptember 30, 2021 and 2020 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 decreased in the nine months endedSeptember 30, 2021 to$283.6 million from$289.3 million for the nine months endedSeptember 30, 2020 , a decrease of$5.7 million . Operating expense increased as a percentage of patient revenues to 83.3% for the nine months endedSeptember 30, 2021 , as compared to 81.2% for the nine months endedSeptember 30, 2020 . 37 -------------------------------------------------------------------------------- Excluding operating expenses related to COVID-19, we benefited from our cost savings initiatives including decreased wages of$11.0 million compared to the nine months endedSeptember 30, 2020 . Additionally, our health insurance costs decreased by$2.3 million . We incurred incremental healthcare-related expenses attributable to COVID-19 of$25.6 million for the nine months endedSeptember 30, 2021 , which is an increase of$8.6 million compared to the nine months endedSeptember 30, 2020 . Such expenses included increased labor expenses, testing and the increased costs of personal protective equipment, food and infection control supplies. Lease Expense Lease expense for the nine months endedSeptember 30, 2021 decreased to$39.8 million as compared to$40.6 million for the nine months endedSeptember 30, 2020 , a decrease of$0.8 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 inFlorida . Professional Liability Professional liability expense was$5.4 million and$6.2 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Our cash expenditures for professional liability costs, including those relative to claims for the centers that we formerly operated in theState of Kentucky , were$5.0 million and$5.1 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Professional liability expense fluctuates based on the results of our third-party professional liability actuarial studies, premiums, and as 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 was$21.3 million for the nine months endedSeptember 30, 2021 and$20.1 million for the nine months endedSeptember 30, 2020 , an increase of$1.2 million . Increased legal and consulting fees of$1.4 million was the primary driver for the fluctuation. Depreciation and Amortization Depreciation and amortization expense was$7.0 million for the nine months endedSeptember 30, 2021 and$6.7 million for the nine months endedSeptember 30, 2020 , an increase of$0.3 million . Interest Expense, Net Interest expense was$3.2 million for the nine months endedSeptember 30, 2021 and$3.8 million for the nine months endedSeptember 30, 2020 . The decrease of$0.6 million was due to a decrease in the outstanding borrowings on our loan facilities. Income from Continuing Operations before Income Taxes; Income from Continuing Operations per Common Share As a result of the above, continuing operations reported income of$2.5 million and$4.8 million before income taxes for the nine months endedSeptember 30, 2021 and 2020, respectively. Basic and diluted income per common share from continuing operations were$0.32 and$0.31 , respectively, for the nine months endedSeptember 30, 2021 , compared to basic and diluted income per common share from continuing operations of$0.68 and$0.67 , respectively, for the nine months endedSeptember 30, 2020 . COVID-19 Impact on Continuing Operations There have been 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. 38 -------------------------------------------------------------------------------- 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. Additionally, we recently applied for funding under Phase 4 of the PHSSEF and the American Rescue Plan Rural funding program; however, we do not know whether we will ultimately receive additional payments under these distributions. 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. Merger Agreement Impact on Liquidity The Company is expecting to complete the Merger in the fourth quarter of 2021, however, consummation of the Merger is subject to the satisfaction (to the extent permitted by applicable law) waiver of the conditions to the completion of the Merger. The Company is unable to fully predict the impact that the timing, completion, or termination of the Merger will have on its liquidity, financial condition and results of operations due to numerous uncertainties. Liquidity Our primary sources of liquidity are the net cash flow provided by the operating activities of our centers and availability under our revolving credit facility. We believe cash flows and our cash on hand will be adequate to service existing debt obligations and fund required capital expenditures for twelve months following 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 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 used in operating activities of continuing operations totaled$5.1 million for the nine months endedSeptember 30, 2021 , compared to net cash provided by operating activities of continuing operations of$47.0 million in the same period of 2020. The primary contributor to the decrease in net cash provided by operating activities was due to the utilization of stimulus funds for COVID-19 related expenses and lost revenues during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . Conversely, a decrease in accounts receivable, which resulted from decreased patient census due to the COVID-19 pandemic and improved cash collections, offset the net cash used in operating activities for the nine months endedSeptember 30, 2021 . Our cash expenditures related to professional liability claims of continuing operations were$5.0 million and$5.1 million for the nine months endedSeptember 30, 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$4.3 million and$4.0 million for the nine months endedSeptember 30, 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$0.8 million and$14.5 million for the nine months endedSeptember 30, 2021 and 2020, respectively. During the nine months endedSeptember 30, 2020 , we used cash to repay$14.8 million of outstanding borrowings on our loan facilities. 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. EffectiveJuly 1, 2013 , the Company established a wholly-owned, offshore limited purpose insurance subsidiary, 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 inTennessee are now covered under the captive insurance policies along with many of the nursing centers inAlabama ,Ohio andTexas , as well as those previously operated by the Company inKentucky andFlorida . 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 39 -------------------------------------------------------------------------------- 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 ofSeptember 30, 2021 , we have recorded total liabilities for reported and settled professional liability claims and estimates for incurred but unreported claims of$23.9 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. 40 -------------------------------------------------------------------------------- Capital Resources OnOctober 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 throughSeptember 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$60.1 million as ofSeptember 30, 2021 with an interest rate of 5.0%. 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. EffectiveJune 10, 2021 , the Company entered into amendments to the Amended Revolver and the Amended Affiliated Revolver. The amendments decreased the borrowing capacity of the Amended Revolver from$36.0 million to$35.0 million and increased the borrowing capacity of the Amended Affiliated Revolver from$2.0 million to$3.0 million . The maturity date of the loan agreements remainsSeptember 30, 2023 . As ofSeptember 30, 2021 , we had$60.5 million of outstanding long-term debt and finance lease obligations. The$60.5 million total includes$0.4 million in finance lease obligations. As ofSeptember 30, 2021 andDecember 31, 2020 , the Company had no outstanding borrowings under its revolvers. The interest rate related to the revolvers was 5.0% as ofSeptember 30, 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$12.5 million outstanding as ofSeptember 30, 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$25.3 million for these revolvers, the balance available for borrowing under the revolvers was$12.8 million atSeptember 30, 2021 . Our lending agreements contain various financial covenants, the most restrictive of which relates to fixed charges coverage ratios. We are in compliance with all such covenants atSeptember 30, 2021 . Our calculated compliance with financial covenants is presented below: Level at RequirementSeptember 30, 2021 Credit Facility: Minimum fixed charge coverage ratio 1.05:1.00
1.14:1.00
Minimum adjusted EBITDA $13.0 million $18.7 million
Mortgaged Centers:
EBITDAR $10.0 million $17.0 million
Affiliated Revolver:
Minimum adjusted EBITDA $0.8 million $1.4
million
Off-Balance Sheet Arrangements We have four letters of credit outstanding with an aggregate value of approximately$12.5 million as ofSeptember 30, 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 41 -------------------------------------------------------------------------------- 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: •risks to the Company with respect to the Merger, including: (i) risks associated with the Company's ability to obtain the stockholder approval or regulatory approval required to consummate the proposed Merger and the timing of the closing of the proposed Merger, including the risks that a condition to closing would not be satisfied within the expected timeframe or at all or that the closing of the proposed Merger will not occur including in circumstances which would require the Company to pay the termination fee or other expenses; (ii) the risk that stockholder litigation in connection with the proposed Merger may affect the timing or occurrence of the proposed Merger or result in significant costs of defense, indemnification and liability; (iii) the occurrence of any event, change or other circumstance or condition that could give rise to the termination of the merger agreement; (iv) unanticipated difficulties or expenditures relating to the Merger, the response of business partners and competitors to the announcement of the proposed Merger, and/or potential difficulties in employee retention as a result of the announcement and pendency of the proposed Merger; (v) risks related to disruption of management's attention from the Company's ongoing business operations due to the Merger; and (vi) the response of Company stockholders to the merger agreement; •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; •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 further modify the Affordable Care Act, its interpretation or implementation, 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; 42
--------------------------------------------------------------------------------
•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, political, and competitive conditions; •changes in anticipated revenue and cost growth; •changes in the anticipated results of operations; and •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 fiscal year endedDecember 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.
Jackson Announces Third Quarter 2021 Results
ELECTROMED, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations.
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