10-K/A: Selectis Health Files Amended 10-K, Citing Internal Control Weaknesses and Operational Shifts

Selectis Health files an amended annual report, highlighting internal control deficiencies and a strategic shift towards operating its own healthcare facilities.

Summary

• Selectis Health, Inc. has filed an amendment to its annual report on Form 10-K, primarily to update financial information related to internal controls and certifications.
• The company owns and operates assisted living, independent living, and skilled nursing facilities, shifting from a leasing model to direct operation.
• As of December 31, 2023, Selectis operates nine healthcare facilities, up from one two years prior, with a total of 13 facilities owned.
• The company's revenue mix has shifted from rental income to healthcare services, with healthcare revenue at $34.5 million for 2023, a decrease from $36.7 million in 2022.
• Healthcare grant revenue also decreased to $1.6 million in 2023 from $3.3 million in 2022, due to a one-time grant in 2022 and the cessation of Oklahoma state grants.
• General and administrative expenses increased to $9.9 million in 2023 from $7.9 million in 2022, due to contingent fees for CARES Act credits and increased professional services.
• The company reported a net loss of $4 million for 2023, compared to a net loss of $2.4 million in 2022.
• The company has identified material weaknesses in its internal controls over financial reporting, including inadequate IT controls, lack of segregation of duties, and insufficient review processes.
• The company has $37.2 million in debt, with a weighted average interest rate of 4.15% on fixed-rate debt and 5.75% on variable-rate debt.
• The company received $6.8 million in employee retention credits under the CARES Act, but has fully reserved for the remaining receivable due to collectability concerns.

Sentiment

Score: 4

Explanation: The document reveals significant financial challenges, including increased losses, decreased revenue, and material weaknesses in internal controls. While there are some positive aspects, such as the shift to an owner-operator model and potential for future growth, the overall tone is negative due to the current financial instability and operational risks.

Positives

• The company has successfully refinanced all mortgages that matured in the 2021 and 2022 fiscal years.
• The company is focusing on optimizing operations in current facilities and anticipates increases in state Medicaid reimbursement rates.
• The company expects to generate positive cash flows from its continued operations.
• The company has multiple sources of liquidity, access to capital markets and secured debt lenders, and relationships with current and prospective institutional joint venture partners.

Negatives

• The company reported a net loss of $4 million for 2023, an increase from the $2.4 million loss in 2022.
• The company has identified material weaknesses in its internal controls over financial reporting.
• The company's healthcare revenue decreased from $36.7 million in 2022 to $34.5 million in 2023.
• The company's healthcare grant revenue decreased from $3.3 million in 2022 to $1.6 million in 2023.
• The company has a significant working capital deficiency and needs to raise additional funds to meet its obligations.
• The company has fully reserved for the remaining employee retention credits receivable due to collectability concerns.

Risks

• The company faces risks related to occupancy rates, which are crucial for revenue generation.
• There is a heightened risk of tenant and operator bankruptcy or insolvency due to the impact of the COVID-19 pandemic.
• The company has incurred increased operational costs due to public health measures and safety protocols.
• The company's ability to acquire and dispose of properties may be limited due to economic uncertainty.
• The company's access to capital could be restricted due to financial market volatility.
• The company faces potential litigation risk related to COVID-19 and other operational issues.
• The company's debt obligations are primarily fixed rate with staggered maturities, which reduces the impact of rising interest rates on operations, but still presents a risk.
• The company's ability to compete may be impacted by national and local economic trends, availability of investment alternatives, and cost of capital.

Future Outlook

The company intends to continue to search for operations that will enhance its portfolio of healthcare centers and plans to own and operate all future facilities. The company anticipates a combination of conventional mortgage loans, at market rates, issuance of revenue bonds and possibly additional equity injections to fund the acquisition cost of any additional properties. The company expects to generate positive cash flows from its continued operations.

Management Comments

• Management believes the company has sufficient liquidity and capital resources to maintain ongoing operations.
• Management is committed to accurate and ethical business practices.
• Management intends to work internally and with various third-parties to ensure proper controls are in place going forward.

Industry Context

The healthcare industry is the largest in the U.S. based on GDP, with national health expenditures expected to grow faster than GDP. Senior citizens are the largest consumers of healthcare services, making senior housing and skilled nursing facilities a significant market. The company's shift to an owner-operator model aligns with a trend of healthcare providers seeking more control over their operations and revenue streams.

Comparison to Industry Standards

• The company's financial performance is mixed compared to industry benchmarks. While some REITs and healthcare operators have seen revenue growth, Selectis experienced a decline in healthcare revenue.
• The company's debt levels are significant, which is common in the healthcare real estate sector, but the company's ability to manage and refinance this debt will be critical.
• The identified material weaknesses in internal controls are a concern, as strong internal controls are essential for financial reporting and compliance in the healthcare industry.
• The company's shift to an owner-operator model is a strategic move that could improve profitability, but it also increases operational risk and complexity.
• Compared to larger, more established healthcare REITs like Welltower (WELL) or Ventas (VTR), Selectis is a smaller player with a more concentrated portfolio and higher operational risk.

Management Changes

Corporate Governance

Legal Proceedings

• The company is involved in a personal injury claim related to the Edwards Redeemer facility, where the company believes it has indemnity coverage.
• The company is involved in a personal injury lawsuit related to the Eastman Healthcare & Rehab Center, where the company believes it has no liability.
• The company is involved in a personal injury lawsuit related to the Warrenton Health and Rehab Facility, where the company believes its exposure is de minimus.
• The company is involved in a personal injury lawsuit related to the Glen Eagle facility, where the company denies negligence and believes its exposure is de minimus.
• The company is involved in a wrongful death lawsuit related to the Glen Eagle facility, where the company denies negligence and believes its exposure is de minimus.

Related Party Transactions

• The company has senior secured promissory notes with related parties totaling $750,000.
• The company has other debt, subordinated secured with related parties totaling $150,000.

Stakeholder Impact

• Shareholders face increased risk due to the company's financial losses and internal control weaknesses.
• Employees may be affected by cost-cutting measures and operational changes.
• Residents of the company's facilities may be impacted by changes in operations and staffing.
• Creditors face increased risk due to the company's high debt levels and financial instability.

Next Steps

• The company plans to implement multi-level review in 2024 to improve internal controls.
• Management intends to work internally and with various third-parties to ensure proper controls are in place going forward.
• The company will focus on improving occupancy rates at its facilities to bolster revenues.
• The company will implement cost-cutting measures at both the facility and corporate level.
• The company will work with lenders to extend mortgages and notes that are maturing.
• The company may sell off key, underperforming properties to improve cash flow.

Key Dates

Keywords

healthcare facilities, assisted living, skilled nursing, internal controls, financial reporting, debt financing, revenue, operating expenses, COVID-19, real estate, mortgage loans, Medicaid, Medicare