10-K: Selectis Health Reports Full Year 2023 Results Amidst Operational Shift

Selectis Health's 2023 annual report reveals a transition towards an owner-operator model, impacting revenue streams and highlighting ongoing financial challenges.

Summary

• Selectis Health's annual report for 2023 shows a shift from leasing facilities to operating them directly, which has significantly altered their revenue mix.
• Rental revenue increased slightly to $634,570 in 2023 from $591,808 in 2022, while healthcare revenue decreased to $34,537,723 from $36,735,683.
• Healthcare grant revenue also saw a decrease, falling to $1,610,754 in 2023 from $3,272,026 in 2022, primarily due to a one-time grant in 2022 and the cessation of Oklahoma state grants.
• General and administrative expenses rose to $9,968,188 in 2023 from $7,869,645 in 2022, due to contingent fees for employee retention credits and increased professional services.
• Property taxes, insurance, and other operating expenses increased to $31,375,921 in 2023 from $29,859,250 in 2022, driven by higher operational headcount and wages.
• The company adopted a new accounting standard for credit losses, resulting in a provision for bad debt of $2,733,157 in 2023, up from $1,364,354 in 2022.
• Depreciation and amortization expenses decreased slightly to $1,666,200 in 2023 from $1,792,840 in 2022.
• Net interest expense decreased slightly to $2,173,763 in 2023 from $2,231,233 in 2022, due to refinancing of mortgages.
• The company recorded income from employee retention credits of $6,866,759 in 2023, compared to $0 in 2022.
• The company had a net loss of $3,970,982 for 2023, compared to a net loss of $2,395,813 in 2022.
• The company had cash and cash equivalents of $1,484,599 and restricted cash of $820,124 as of December 31, 2023.
• The company has refinanced all mortgages that matured in the 2021 and 2022 fiscal years.
• The company has a significant amount of debt, with total debt of $37,246,536 as of December 31, 2023.
• The company believes it has sufficient liquidity and capital resources to maintain ongoing operations due to refinancing debt, optimizing operations, and anticipated increases in Medicaid reimbursement rates.

Sentiment

Score: 3

Explanation: The document reveals significant financial challenges, including a substantial net loss, increased expenses, and a working capital deficit. While there are some positive aspects, such as the refinancing of debt and the receipt of employee retention credits, the overall tone is negative due to the company's financial instability and the uncertainty surrounding its ability to continue as a going concern.

Positives

• The company successfully refinanced all mortgages that matured in 2021 and 2022.
• The company received a significant amount of income from employee retention credits.
• The company is actively working to optimize operations and improve cash flow.
• The company has a plan to address its liquidity issues, including improving occupancy rates, cutting costs, and working with lenders.

Negatives

• Healthcare revenue decreased by $2.2 million year-over-year.
• Healthcare grant revenue decreased by $1.7 million year-over-year.
• General and administrative expenses increased by $2.1 million year-over-year.
• The company recorded a net loss of $4 million for 2023.
• The company has a significant amount of debt, with total debt of $37.2 million as of December 31, 2023.
• The company has a net working capital deficit of $13.2 million.
• There is substantial doubt about the company's ability to continue as a going concern.

Risks

• The company's revenues are dependent on occupancy rates, which have been impacted by the COVID-19 pandemic.
• The company faces the risk of tenant and operator bankruptcy or insolvency.
• 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 may be restricted due to financial market volatility.
• The company's internal controls over financial reporting have material weaknesses.
• The company has a significant amount of debt, with total debt of $37.2 million as of December 31, 2023.
• The company has a net working capital deficit of $13.2 million.
• There is substantial doubt about the company's ability to continue as a going concern.

Future Outlook

The Company intends to continue to search for operations that will enhance its portfolio of healthcare centers and expects increases in revenue as it assumes operations and purchases more 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 is committed to providing a positive and engaging work environment for its employees.

Industry Context

The healthcare industry is the single largest industry in the U.S. based on GDP, and senior citizens are the largest consumers of healthcare services. The company's shift towards an owner-operator model reflects a broader trend in the healthcare industry where providers are seeking greater control over their operations and revenue streams. The company faces competition from REITs, investment companies, private equity and hedge fund investors, sovereign funds, healthcare operators, lenders, developers, and other institutional investors.

Comparison to Industry Standards

• The document does not provide specific benchmarks for comparison to industry standards.
• However, the document does mention that the healthcare industry is highly competitive, with competition from REITs, investment companies, private equity and hedge fund investors, sovereign funds, healthcare operators, lenders, developers, and other institutional investors.
• The document also notes that income from facilities is dependent on the ability of operations and tenants to compete with other healthcare companies on a number of different levels, including the quality of care provided, reputation, the physical appearance of a facility, price and range of services offered, alternatives for healthcare delivery, the supply of competing properties, physicians, staff, referral sources, location, the size and demographics of the population in surrounding areas, and the financial condition of tenants and operators.
• The document does not provide specific details on how Selectis Health's results compare to these competitors or industry benchmarks.

Management Changes

Corporate Governance

Legal Proceedings

• The company is involved in several legal proceedings, including personal injury and wrongful death lawsuits.
• The company believes its exposure in these matters is de minimus and has referred the litigation to its insurance company for management.

Related Party Transactions

• The company has senior secured promissory notes with related parties.
• The company has other debt with related parties.
• The company had a sale of $100,000 Units in the 2018 Offering of 11% Senior Secured Notes to a related party.

Stakeholder Impact

• Shareholders face the risk of further losses due to the company's financial instability.
• Employees may be affected by cost-cutting measures and potential staffing changes.
• Tenants and operators face the risk of bankruptcy or insolvency.
• Customers may be affected by changes in the quality of care or services provided.
• Creditors face the risk of non-payment due to the company's financial difficulties.

Next Steps

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

Key Dates

Keywords

healthcare, skilled nursing facilities, assisted living facilities, senior housing, real estate, mortgage loans, debt, revenue, occupancy, COVID-19, financial results, employee retention credits, internal controls