Diversicare Healthcare Services, Inc. - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - Diversicare Healthcare Services, Inc.	dvcr-ex32x33120certificati.htm
EX-31.2 - EXHIBIT 31.2 - Diversicare Healthcare Services, Inc.	dvcr-ex312x33120certificat.htm
EX-31.1 - EXHIBIT 31.1 - Diversicare Healthcare Services, Inc.	dvcr-ex311x33120certificat.htm
EX-10.10 - EXHIBIT 10.10 - Diversicare Healthcare Services, Inc.	dvcr-ex1010xsecondamendmen.htm
EX-10.9 - EXHIBIT 10.9 - Diversicare Healthcare Services, Inc.	dvcr-ex109xseventhamendmen.htm
EX-10.8 - EXHIBIT 10.8 - Diversicare Healthcare Services, Inc.	dvcr-ex108xninthamendmentt.htm
EX-10.7 - EXHIBIT 10.7 - Diversicare Healthcare Services, Inc.	dvcr-ex107xbeckybodieemplo.htm
EX-10.6 - EXHIBIT 10.6 - Diversicare Healthcare Services, Inc.	dvcr-ex106xlesliecampbells.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________

FORM 10-Q

________________________________

CHECK ONE:



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: March 31, 2020



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file No.: 1-12996

________________________________

Diversicare Healthcare Services, Inc.

(exact name of registrant as specified in its charter)

________________________________



Delaware		62-1559667
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1621 Galleria Boulevard, Brentwood, TN 37027

(Address of principal executive offices) (Zip Code)

(615) 771-7575

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each Class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	DVCR	OTCQX

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨(do not check if a smaller reporting company)	Smaller reporting company	ý
		Emerging growth company	¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

6,865,689

(Outstanding shares of the issuer’s common stock as of May 4, 2020)

Part I. FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS

(in thousands)



	March 31, 2020			December 31, 2019
	(Unaudited)
CURRENT ASSETS:
Cash	$	4,163		$	2,710
Receivables	59,455			60,521
Self-insurance receivables, current portion	1,831			1,011
Other receivables	2,409			2,534
Prepaid expenses and other current assets	3,894			5,056
Income tax refundable	664			484
Total current assets	72,416			72,316
PROPERTY AND EQUIPMENT, at cost	133,701			132,775
Less accumulated depreciation and amortization	(87,174		)	(85,020		)
Property and equipment, net	46,527			47,755
OTHER ASSETS:
Operating lease right-of-use assets	303,754			310,238
Acquired leasehold interest, net	5,603			5,736
Other noncurrent assets	2,896			4,323
Total other assets	312,253			320,297
	$	431,196		$	440,368

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(continued)



	March 31, 2020			December 31, 2019
	(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt and finance lease obligations	$	3,467		$	3,498
Current portion of operating lease liabilities	24,529			23,736
Trade accounts payable	13,651			14,641
Accrued expenses:
Payroll and employee benefits	17,111			16,780
Self-insurance reserves, current portion	14,254			13,829
Other current liabilities	11,158			11,545
Total current liabilities	84,170			84,029
NONCURRENT LIABILITIES:
Long-term debt and finance lease obligations, less current portion and deferred financing costs, net	70,944			70,637
Operating lease liabilities, less current portion	289,187			295,636
Self-insurance reserves, noncurrent portion	14,722			16,291
Litigation contingency, less current portion	8,000			9,000
Other noncurrent liabilities	1,779			1,691
Total noncurrent liabilities	384,632			393,255
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ DEFICIT:
Common stock, authorized 20,000 shares, $.01 par value, 7,098 and 6,908 shares issued, and 6,866 and 6,676 shares outstanding, respectively	70			69
Treasury stock at cost, 232 shares of common stock	(2,500		)	(2,500		)
Paid-in capital	24,367			24,026
Accumulated deficit	(59,832		)	(59,079		)
Accumulated other comprehensive income	289			568
Total shareholders’ deficit	(37,606		)	(36,916		)
	$	431,196		$	440,368

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts, unaudited)



	Three Months Ended March 31,
	2020			2019
PATIENT REVENUES, net	$	119,987		$	117,550
EXPENSES:
Operating	94,859			94,422
Lease and rent expense	13,512			13,115
Professional liability	1,839			1,851
General and administrative	6,758			7,213
Depreciation and amortization	2,288			2,317
Total expenses	119,256			118,918
OPERATING INCOME (LOSS)	731			(1,368		)
OTHER INCOME (EXPENSE):
Other income	115			160
Interest expense, net	(1,460		)	(1,394		)
Total other expense	(1,345		)	(1,234		)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(614		)	(2,602		)
BENEFIT FOR INCOME TAXES	104			1,028
LOSS FROM CONTINUING OPERATIONS	(510		)	(1,574		)
LOSS FROM DISCONTINUED OPERATIONS:
Operating loss, net of tax benefit of $65 and $73, respectively	(243		)	(1,772		)
NET LOSS	$	(753	)	$	(3,346	)
NET LOSS PER COMMON SHARE:
Per common share – basic
Continuing operations	$	(0.08	)	$	(0.24	)
Discontinued operations	(0.04		)	(0.28		)
	$	(0.12	)	$	(0.52	)
Per common share – diluted
Continuing operations	$	(0.08	)	$	(0.24	)
Discontinued operations	(0.04		)	(0.28		)
	$	(0.12	)	$	(0.52	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	6,506			6,424
Diluted	6,506			6,424

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands and unaudited)



	Three Months Ended March 31,
	2020			2019
NET LOSS	$	(753	)	$	(3,346	)
OTHER COMPREHENSIVE LOSS:
Change in fair value of cash flow hedge, net of tax	(279		)	(63		)
Total other comprehensive loss	(279		)	(63		)
COMPREHENSIVE LOSS	$	(1,032	)	$	(3,409	)

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

(in thousands and unaudited)



	Common Stock			Treasury Stock				Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Deficit
	Shares Issued	Amount		Shares	Amount			Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Deficit

BALANCE, DECEMBER 31, 2018	6,751	$	68	232	$	(2,500	)	$	23,413	$	(23,016	)	$	837		$	(1,198	)
Net loss	—	—		—	—			—		(3,346		)	—			(3,346		)
Issuance/redemption of equity grants, net	163	1		—	—			41		—			—			42
Interest rate cash flow hedge	—	—		—	—			—		—			(63		)	(63		)
Stock-based compensation	—	—		—	—			140		—			—			140
BALANCE, MARCH 31, 2019	6,914	$	69	232	$	(2,500	)	$	23,594	$	(26,362	)	$	774		$	(4,425	)

BALANCE, DECEMBER 31, 2019	6,908	$	69	232	$	(2,500	)	$	24,026	$	(59,079	)	$	568		$	(36,916	)
Net loss	—	—		—	—			—		(753		)	—			(753		)
Issuance/redemption of equity grants, net	190	1		—	—			3		—			—			4
Interest rate cash flow hedge	—	—		—	—			—		—			(279		)	(279		)
Stock-based compensation	—	—		—	—			338		—			—			338
BALANCE, MARCH 31, 2020	7,098	$	70	232	$	(2,500	)	$	24,367	$	(59,832	)	$	289		$	(37,606	)

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands and unaudited)



	Three Months Ended March 31,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(753	)	$	(3,346	)
Loss from discontinued operations	(243		)	(1,772		)
Loss from continuing operations	(510		)	(1,574		)
Adjustments to reconcile loss from continuing operations to net cash provided by operating activities:
Depreciation and amortization	2,288			2,317
Deferred income tax benefit	—			(1,090		)
Provision for self-insured professional liability, net of cash payments	173			1,444
Amortization of right-of-use assets	5,663			5,125
Stock-based and deferred compensation	338			156
Provision for leases in excess of cash payments	821			1,280
Other	517			335
Changes in assets and liabilities affecting operating activities:
Receivables	246			5,315
Prepaid expenses and other assets	792			(2,966		)
Trade accounts payable and accrued expenses	(2,021		)	(3,293		)
Operating lease liabilities	(5,656		)	(5,101		)
Net cash provided by continuing operations	2,651			1,948
Discontinued operations	(243		)	(1,609		)
Net cash provided by operating activities	2,408			339
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(927		)	(1,186		)
Net cash used in continuing operations	(927		)	(1,186		)
Discontinued operations	—			(312		)
Net cash used in investing activities	(927		)	(1,498		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt and finance lease obligations	(2,113		)	(1,112		)
Proceeds from issuance of debt	2,500			2,049
Financing costs	(419		)	(40		)
Issuance and redemption of employee equity awards, net	4			42
Net cash provided by (used in) continuing operations	(28		)	939
Discontinued operations	—			—
Net cash provided by (used in) financing activities	$	(28	)	$	939

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands and unaudited)

(continued)



	Three Months Ended March 31,
	2020		2019
NET INCREASE (DECREASE) IN CASH	$	1,453	$	(220	)
CASH, beginning of period	2,710		2,685
CASH, end of period	$	4,163	$	2,465
SUPPLEMENTAL INFORMATION:
Cash payments of interest	$	1,599	$	1,829
Cash payments of income taxes	$	10	$	426
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Acquisition of equipment through finance leases	$	—	$	49
Acquisition of operating leases though adoption of ASC 842	$	—	$	389,403

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020 AND 2019

(Dollars and shares in thousands, except per share data)

(Unaudited)


1.	BUSINESS

Diversicare Healthcare Services, Inc. (together with its subsidiaries, “Diversicare” or the “Company”) provides long-term care services to nursing center patients in nine states, primarily in the Southeast, Midwest, and Southwest. The Company’s centers provide a range of health care services to their patients and residents that include nursing, personal care, and social services. Additionally, the Company’s nursing centers also offer a variety of comprehensive rehabilitation services, as well as nutritional support services. The Company's continuing operations include centers in Alabama, Florida, Indiana, Kansas, Mississippi, Missouri, Ohio, Tennessee, and Texas.

As of March 31, 2020, the Company’s continuing operations consist of 62 nursing centers with 7,329 licensed nursing beds. The Company owns 15 and leases 47 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 and residential living beds.

Recent Developments

In March 2020, the World Health Organization categorized the disease known as COVID-19 that is caused by a novel coronavirus (“COVID-19”), as a pandemic. The President of the United States declared the COVID-19 outbreak a national emergency.

The Centers for Medicare & Medicaid Services (“CMS”) and the Centers for Disease Control and Prevention (“CDC”) have issued guidance to state and local governments and long-term care facilities to help mitigate the spread of COVID-19. On March 13, 2020, CMS and CDC issued a prohibition of visitors to long-term care facilities as a precaution to keep residents and patients safe. Additionally, on March 23, 2020, CMS announced new, focused infection control surveys intended to assess long-term care facility compliance with infection control requirements in connection with the COVID-19 pandemic.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes, among other things, modifications to the limitation on business interest expense and net operating loss provisions, allows an optional payment deferral of employer payroll taxes during 2020 after the date of enactment and the appropriation of stimulus funds to Medicare and Medicaid providers. On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act ("PPPHCE Act") was enacted, which provides for additional emergency appropriations for COVID-19 response. We continue to examine the impact that the CARES Act may have on our business. Currently, we are unable to determine the full impact that the CARES Act will have on our financial condition, results of operations, or liquidity.

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 a select number of our centers, and we have incurred an increase in the costs of caring for the patients and residents in those centers. 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 staying up to date on the latest information about the virus and its prevalence. The Company has implemented precautionary measures and response protocols to minimize the spread of the virus, following guidance from the CDC, but the Company nevertheless expects additional cases of the virus will occur at these and other facilities. The Company is continuing to evaluate and consider the potential impact that the virus may have on its liquidity, financial condition and results of operations due to numerous uncertainties. However, given the uncertainty as to the duration of the COVID-19 pandemic, it could have a material adverse effect on the Company's future results of operations, financial condition and liquidity. Refer to Notes 9, “Income Taxes,” and 13, “Subsequent Events” for more information.


2.	CONSOLIDATION AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

The interim consolidated financial statements for the three month periods ended March 31, 2020 and 2019, included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. In the opinion of management of the Company, the accompanying interim consolidated financial statements reflect all normal, recurring adjustments necessary to present fairly the Company’s financial position at March 31, 2020, and the results of operations, and changes in shareholders' deficit and cash flows for the three month periods ended March 31, 2020 and 2019. The Company’s balance sheet information at December 31, 2019, was derived from its audited consolidated financial statements as of December 31, 2019.

Effective January 1, 2019, we adopted the requirements of Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), as discussed in Notes 3 and 6 to the interim consolidated financial statements. All amounts and disclosures set forth in these financial statements comply with the new standard.

The results of operations for the periods ended March 31, 2020 and 2019 are not necessarily indicative of the operating results that may be expected for a full year. These interim consolidated financial statements should be read in connection with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Discontinued Operations

On December 1, 2018, the Company sold three Kentucky properties for a purchase price of $18.7 million, which are collectively referred to as the "Kentucky Properties." On August 30, 2019, the Company terminated operations of ten centers in Kentucky and concurrently transferred operations to a new operator. These ten centers are collectively referred to as the "Kentucky Centers." The sale of the Kentucky Properties and the termination of operations at the Kentucky Centers are referred to collectively as the "Kentucky Exit." As a result of the Kentucky Exit, the Company no longer operates any skilled nursing centers in the State of Kentucky. The Company's exit from the state represents a strategic shift that has (or will have) a major effect on the Company's financial position, results of operations and cash flows. In accordance with ASC 205, the Company's discontinued operating results have been reclassified on the face of the financial statements and footnotes for all periods presented to reflect the discontinued status of these operations. Refer to Note 12, "Discontinued Operations" for more information.


3.	RECENT ACCOUNTING GUIDANCE

Recent Accounting Standards Adopted by the Company

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842). The standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. For short-term leases (those with a term of 12 months or less and that do not include a lessee purchase option that is reasonably certain to be exercised), a lessee is permitted to make (and the Company chose to utilize) an accounting policy election by asset class not to recognize ROU assets and lease liabilities, which would generally result in lease expense for these short term leases being recognized on a straight-line basis over the lease term. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted the requirements of this standard effective January 1, 2019. In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements, which allows lessees and lessors to recognize and measure existing leases at the beginning of the period of adoption without modifying the comparative period financial statements (which therefore will remain under prior GAAP, Topic 840, Leases). The Company elected to use the optional expedient to reflect adoption in the period of adoption (January 1, 2019) rather than the earliest period presented. The Company also elected the package of practical expedients upon transition, which includes retaining the lease classification for any leases that exist prior to adoption of the standard. The adoption of the new standard resulted in the recording of net lease assets and lease liabilities of $384,187 and $389,403, respectively, as of January 1, 2019. The standard did not materially impact our consolidated net earnings and had no impact on cash flows. See Note 6, "Leases" for a discussion regarding leases under the new standard.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which is intended to simplify and amend the application of hedge accounting to more clearly portray the economics of an entity’s risk management strategies in its financial statements. The new guidance will make more financial and nonfinancial hedging strategies eligible for hedge accounting and reduce complexity in fair value hedges of interest rate risk. The new guidance also changes how companies assess effectiveness and amends the presentation and disclosure requirements. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally the entire change in the fair value of a hedging instrument will be required to be presented in the same income statement line as the hedged item. The new guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. The new guidance is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those years. The Company adopted the requirements of this standard effective January 1, 2019. The adoption did not have a material impact on our consolidated financial statements and related disclosures. In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 805): Inclusion of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap ("OIS") Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The ASU amends ASC 815 to add the OIS rate based on the SOFR as a fifth US benchmark interest rate. The Company adopted the requirements of this standard effective January 1, 2019. The adoption did not have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements of fair value measurements under Topic 820. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those years. The Company adopted the requirements of this standard effective January 1, 2019. The adoption did not have a material impact on our consolidated financial statements and related disclosures.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The new guidance contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU No. 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The amendments in the ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

Accounting Standards Recently Issued But Not Yet Adopted by the Company

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance intends to improve financial reporting by requiring timelier recognition of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. This update requires that financial statement assets measured at an amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. This standard is effective for the fiscal year beginning after December 15, 2022 with early adoption permitted. The Company is in the initial stages of evaluating the impact from the adoption of this new standard on the consolidated financial statements and related disclosures.

4. REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE

The Company's revenue is derived from providing quality healthcare services to its patients. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. The promise to provide quality care is accounted for as a single performance obligation satisfied at a point in time, when those services are rendered.

The Company performed analyses using the application of the portfolio approach as a practical expedient to group patient contracts with similar characteristics, such that revenue for a given portfolio would not be materially different than if it were evaluated on a contract-by-contract basis. These analyses incorporated consideration of reimbursements at varying rates from Medicaid, Medicare, Managed Care, Private Pay, Assisted Living, Hospice, and Veterans for services provided in each corresponding state. It was determined that the contracts are not materially different for the following groups: Medicaid, Medicare, Managed Care and Private Pay and other (Assisted Living, Hospice and Veterans).

Disaggregation of Revenue and Accounts Receivable

The Company received $900 of Medicaid stimulus dollars, which related to March 2020 and is reflected in the Company's results of operations for the three month periods ended March 31, 2020. The following table summarizes revenue from contracts with customers by payor source from continuing operations for the periods presented (dollar amounts in thousands):



	Three Months Ended March 31,
	2020				2019
Medicaid	$	54,330	45.3	%	$	53,811	45.8	%
Medicare	20,672		17.2	%	20,391		17.3	%
Managed Care	12,596		10.5	%	12,998		11.1	%
Private Pay and other	32,389		27.0	%	30,350		25.8	%
Total	$	119,987	100.0	%	$	117,550	100.0	%

Accounts receivable from continuing operations as of March 31, 2020 and December 31, 2019 are summarized in the following table:



	March 31,		December 31,
	2020		2019
Medicaid	$	23,321	$	21,998
Medicare	9,621		11,811
Managed Care	8,052		9,103
Private Pay and other	18,461		17,609
Total accounts receivable	$	59,455	$	60,521


5.	LONG-TERM DEBT AND INTEREST RATE SWAP

On February 26, 2016, the Company executed an Amended and Restated Credit Agreement (the "Credit Agreement") with a syndicate of banks, which consists of a $80,000 mortgage loan subsequently amended ("Amended Mortgage Loan") and a $52,250 revolver subsequently amended ("Amended Revolver"). The Amended Mortgage Loan and Amended Revolver both have a five-year maturity through September 30, 2021. The Amended Mortgage Loan consists of $67,500 term and $12,500 acquisition loan facilities. The Amended Mortgage Loan has a term of five years, with principal and interest payable monthly based on a 25-year amortization. Interest on the term and acquisition loan facilities is based on LIBOR plus 4.0% and 4.75%, respectively. A portion of the Amended Mortgage Loan is effectively fixed at 5.79% pursuant to an interest rate swap with an initial notional amount of $30,000. The Amended Mortgage Loan balance was $58,640 as of March 31, 2020, consisting of $49,240 on the term loan facility with an interest rate of 5.75% and $9,400 on the acquisition loan facility with an interest rate of 6.50%. The Amended Mortgage Loan is secured by fifteen owned nursing centers, related equipment and a lien on the accounts receivable of these centers. The Amended Mortgage Loan and the Amended Revolver are cross-collateralized and cross-defaulted. The Company’s Amended Revolver has an interest rate of LIBOR plus 4.0% and is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions.

In connection with the sale of the Kentucky Properties, the Company entered into the Sixth Amendment ("Sixth Revolver Amendment") to amend the Amended Revolver effective December 1, 2018. The Sixth Amendment decreased the Amended Revolver capacity from $52,250 to $42,250. The Company also applied $4,947 of net proceeds from the sale of the Kentucky Properties to the outstanding borrowings under the Amended Revolver.

Also effective December 1, 2018, the Company executed a Fourth Amendment (the "Fourth Term Amendment") to amend the Amended Mortgage Loan. The Company applied $11,100 and $2,100 of net proceeds from the sale of the Kentucky Properties to the Term Loan and Acquisition Loan, respectively. Additionally, we amended the Acquisition Loan availability to include a reserve of $2,100, and therefore, our borrowing capacity is $10,400 as of March 31,2020. On April 3, 2020, the Company entered into an agreement to amend the Amended Mortgage Loan, which removes the $2,100 reserve and increases our borrowing capacity to $12,500. See Note 13, "Subsequent Events" for further discussion on the amended debt agreement.

The Company is participating in the Texas Quality Incentive Payment Program ("QIPP"). Effective May 13, 2019, the Company entered into a Fifth Amendment (the “Fifth Term Amendment”) to amend the Amended Mortgage Loan to release the operators of three of the QIPP centers in Texas from the Amended Mortgage Loan and a Seventh Amendment (the “Seventh Revolver Amendment”) to amend the Amended Revolver to remove the operators of four of the QIPP centers in Texas from the Amended Revolver and to permanently reduce the amount available under the Amended Revolver by $2,000. At the same time, the operators of these four facilities entered into a separate revolving loan (the "affiliated revolver") with the same syndicate of banks to provide for the temporary working capital requirements of the four QIPP centers. The affiliated revolver, which is guaranteed by the Company, has an initial capacity of $5,000, which amount is reduced by $1,000 on each of January 1, 2020, April 1, 2020 and July 1, 2020. The affiliated revolver has the same maturity date as the Amended Revolver and the Amended Mortgage Loan of September 30, 2021. The affiliated revolver is cross-defaulted with the Amended Revolver and the Amended Mortgage Loan. For further discussion of the QIPP centers in Texas, refer to Note 11, "Business Development and Other Significant Transactions." As of March 31, 2020, the Company had $1,000 borrowings outstanding under the affiliated revolver. The interest rate related to the affiliated revolver was 5.75% as of March 31, 2020. The balance available for borrowing under the affiliated revolver was $200 at March 31, 2020.

As of March 31, 2020, the Company had $15,000 borrowings outstanding under the Amended Revolver compared to $15,000 outstanding as of December 31, 2019. The interest rate related to the Amended Revolver was 5.75% as of March 31, 2020. The outstanding borrowings on the revolver were used primarily for temporary working capital requirements. 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 $12,143 outstanding as of March 31, 2020. Considering the balance of eligible accounts receivable, the letters of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of $32,108, the balance available for borrowing under the Amended Revolver and affiliated revolver was $3,965 at March 31, 2020.

The Company’s debt agreements contain various financial covenants, the most restrictive of which relates to debt service coverage ratios. The Company is in compliance with all such covenants at March 31, 2020.

Interest Rate Swap Transaction

As part of the debt agreements entered into in April 2013, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The Company entered into the interest rate swap agreement to mitigate the variable interest rate risk on its outstanding mortgage borrowings. The Company designated its interest rate swap as a cash flow hedge and the effective portion of the hedge, net of taxes, is reflected as a component of other comprehensive income (loss). In conjunction with the aforementioned amendment to the Credit Agreement that occurred in February 2016, the Company retained the previously agreed upon interest rate swap modifying the terms of the swap to reflect the amended Credit Agreement. The Company redesignated the interest rate swap as a cash flow hedge. The interest rate swap agreement has a maturity date of February 26, 2021, and has

an amortizing notional amount that was $26,555 as of March 31, 2020. The interest rate swap agreement requires the Company to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of 5.79% while the bank is obligated to make payments to the Company based on LIBOR on the same notional amount. The applicable guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value in a company's balance sheets.

The Company assesses the effectiveness of its interest rate swap on a quarterly basis, and at March 31, 2020, the Company determined that the interest rate swap was highly effective. The interest rate swap valuation model indicated a net liability of $336 at March 31, 2020. The fair value of the interest rate swap is included in “other current liabilities” on the Company’s interim consolidated balance sheet. The change in the interest rate swap liability is included in accumulated other comprehensive income at March 31, 2020 is $279. As the Company’s interest rate swap is not traded on a market exchange, the fair value is determined using a discounted cash flow analysis. This analysis reflects the contractual terms of the interest rate swap agreement and uses observable market-based inputs, including estimated future LIBOR interest rates. The interest rate swap valuation is classified in Level 2 of the fair value hierarchy, in accordance with the FASB guidance set forth in ASC 820, Fair Value Measurement.

6. LEASES

The Company has operating and finance leases for facilities, corporate offices, and certain equipment. The Company recognizes lease expense for these operating leases on a straight-line basis over the lease term. Leases with an initial term of one year or less are not recorded on the balance sheet. The Company's other leases have original lease terms of one to twelve years, some of which include options to extend the lease for up to twenty years, and some of which include options to terminate the leases within one year. The exercise of lease renewal options is at our sole discretion. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Upon adoption of Topic 842, the Company elected the practical expedient to not separate lease and non-lease components for all of its leases as the non-lease components are not significant to the overall lease costs.

Leases



	Classification	March 31, 2020		December 31, 2019
Assets
Operating lease assets	Operating lease right-of-use assets	$	303,754	$	310,238
Finance lease assets	Property and equipment, net^(a)	856		906
Total leased assets		$	304,610	$	311,144

Liabilities
Current
Operating	Current portion of operating lease liabilities	$	24,529	$	23,736
Finance	Current portion of long-term debt and finance lease obligations, net	234		231
Noncurrent
Operating	Operating lease liabilities, less current portion	289,187		295,636
Finance	Long-term debt and finance lease obligations, less current portion and deferred financing costs, net	390		445
Total lease liabilities		$	314,340	$	320,048

^(a)Finance lease assets are recorded net of accumulated amortization of $1,583 and $1,522 as of March 31, 2020 and December 31, 2019, respectively.

Lease Cost of Continuing Operations



		Three Months Ended March 31,
	Classification	2020		2019
Operating lease cost ^(a)	Lease and rent expense	$	13,512	$	13,115
Finance lease cost:
Amortization of finance lease assets	Depreciation and amortization	61		67
Interest on finance lease liabilities	Interest expense, net	9		11
Short term lease cost	Operating expense	179		141
Net lease cost		$	13,761	$	13,334

^(a)Includes variable lease costs, which are immaterial

Maturity of Lease Liabilities



As of March 31, 2020
	Operating Leases ^(a)			Finance Leases ^(a)			Total

2020	$	51,073		$	269		$	51,342
2021	52,063			233			52,296
2022	53,072			136			53,208
2023	54,015			35			54,050
2024	53,898			7			53,905
After 2024	186,982			—			186,982
Total lease payments	$	451,103		$	680		$	451,783
Less: Interest	(137,387		)	(56		)	(137,443		)
Present value of lease liabilities	$	313,716		$	624		$	314,340

^(a) Operating and Finance lease payments exclude option to extend lease terms that are not reasonably certain of being exercised.

The measurement of right-of-use assets and lease liabilities requires the Company to estimate appropriate discount rates. To the extent the rate implicit in the lease is readily determinable, such rate is utilized. However, based on information available at lease commencement for the majority of our leases, the rate implicit in the lease is not known. In these instances, the Company utilizes an incremental borrowing rate, which represents the rate of interest that it would pay to borrow on a collateralized basis over a similar term.

Lease Term and Discount Rate



	March 31, 2020	December 31, 2019

Weighted-average remaining lease term (years)
Operating leases	8.57	8.81
Finance leases	3.00	3.00
Weighted-average discount rate
Operating leases	8.9%	8.9%
Finance leases	6.1%	6.1%

Other Information



	Three Months Ended March 31,
	2020		2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows for operating leases	$	12,673	$	12,132
Operating cash flows for finance leases	$	9	$	11
Financing cash flows for finance leases	$	52	$	132
Acquisition of operating leases through adoption of ASC 842	$	—	$	389,403

7. COMMITMENTS AND CONTINGENCIES

Professional Liability and Other Liability Insurance

The Company has professional liability insurance coverage for its nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a wholly-owned, offshore limited purpose insurance subsidiary, SHC Risk Carriers, Inc. (“SHC”), to replace some of the expiring commercial policies. SHC covers losses up to specified limits per occurrence. All of the Company's nursing centers in Florida, and Tennessee are now covered under the captive insurance policies along with many of the nursing centers in Alabama, Kentucky, and Texas. The insurance coverage provided for these centers under the SHC policy provides coverage limits of at least $1,000 per medical incident with a sublimit per center of $3,000 and total annual aggregate policy limits of $5,000. All other centers within the Company's portfolio are covered through various commercial insurance policies which provide similar coverage limits per medical incident, per location, and on an aggregate basis for covered centers. The deductibles for these policies are covered through the insurance subsidiary.

Reserve for Estimated Self-Insured Professional Liability Claims

Because the Company’s actual liability for existing and anticipated professional liability and general liability claims will likely exceed the Company’s limited insurance coverage, the Company has recorded total liabilities for reported and estimated future claims of $26,403 and $27,390 as of March 31, 2020 and December 31, 2019, respectively. This accrual includes estimates of liability for incurred but not reported claims, estimates of liability for reported but unresolved claims, actual liabilities related to settlements, including settlements to be paid over time, and estimates of legal costs related to these claims. All losses are projected on an undiscounted basis and are presented without regard to any potential insurance recoveries. Amounts are added to the accrual for estimates of anticipated liability for claims incurred during each period, and amounts are deducted from the accrual for settlements paid on existing claims during each period.

The Company evaluates the adequacy of this liability on a quarterly basis. Semi-annually, the Company retains a third-party actuarial firm to assist in the evaluation of this reserve. Since May 2012, the actuary has assisted management in the preparation of the appropriate accrual for incurred but not reported general and professional liability claims based on data furnished as of May 31 and November 30 of each year. The actuary primarily utilizes historical data regarding the frequency and cost of the Company’s past claims over a multi-year period, industry data and information regarding the number of occupied beds to develop its estimates of the Company’s ultimate professional liability cost for current periods.

On a quarterly basis, the Company obtains reports of asserted claims and lawsuits incurred. These reports, which are provided by the Company’s insurers and a third-party claims administrator, contain information relevant to the actual expense already incurred with each claim as well as the third-party administrator’s estimate of the anticipated total cost of the claim. This information is reviewed by the Company quarterly and provided to the actuary semi-annually. Based on the Company’s evaluation of the actual claim information obtained, the semi-annual estimates received from the third-party actuary, the amounts paid and committed for settlements of claims and on estimates regarding the number and cost of additional claims anticipated in the future, the reserve estimate for a particular period may be revised upward or downward on a quarterly basis. Any increase in the accrual decreases results of operations in the period and any reduction in the accrual increases results of operations during the period.

As of March 31, 2020, the Company is engaged in 98 professional liability lawsuits. Fifteen lawsuits are currently scheduled for trial or arbitration during the next twelve months, and it is expected that additional cases will be set for trial or hearing. The Company’s cash expenditures for self-insured professional liability costs were $1,840 and $1,906 for the three months ended March 31, 2020 and 2019, respectively.

The Company follows the accounting guidance in ASC Topic 954 that clarifies that a health care entity should not net insurance recoveries against a related professional liability claim and that the amount of the claim liability should be determined without consideration of insurance recoveries. Accordingly, the estimated insurance recovery receivables are included within "Self-insurance receivables, current portion" and "other noncurrent assets" on the Consolidated Balance Sheet. As of March 31, 2020 and December 31, 2019 there are estimated insurance recovery receivables of $1,831 and $1,011 in "Self-insurance receivables, current portion" and $155 and $1,555 in "other noncurrent assets," respectively.

Although the Company adjusts its accrual for professional and general liability claims on a quarterly basis and retains a third-party actuarial firm semi-annually to assist management in estimating the appropriate accrual, professional and general liability claims are inherently uncertain, and the liability associated with anticipated claims is very difficult to estimate. Professional liability cases have a long cycle from the date of an incident to the date a case is resolved, and final determination of the Company’s actual liability for claims incurred in any given period is a process that takes years. As a result, the Company’s actual liabilities may vary significantly from the accrual, and the amount of the accrual has and may continue to fluctuate by a material amount in any given period. Each change in the amount of this accrual will directly affect the Company’s reported earnings and financial position for the period in which the change in accrual is made.

Civil Investigative Demand ("CID")

In February 2020, we entered into a settlement agreement with the U.S. Department of Justice and the State of Tennessee of actions alleging violations of the federal False Claims Act in connection with our provision of therapy and the completion of certain resident admission forms. This settlement resolved an investigation that had begun in 2012 and covers the time period from January 1, 2010 through December 31, 2015. This agreement requires annual payments for a period of five years ending in February 2025 and also requires a contingent payment in the event the Company sells any of its owned facilities during the five-year payment period. Relative to the settlement agreement, the Company paid $500 during the first quarter of 2020, and the Company has included $1,000 and $8,000 within "Other current liabilities" and "Other noncurrent liabilities", respectively, on the Consolidated Balance Sheets. Failure to make timely any of these payments could result in rescission of the settlement and result in the government having a very large claim against us, including penalties, and/or make us ineligible to participate in certain government funded healthcare programs, any of which could in turn significantly harm our business and financial condition.

In conjunction with the settlement of the government investigation related to our therapy practices, we entered into a corporate integrity agreement ("CIA") with the Office of the Inspector General of CMS. The CIA has a term of five years and imposes material burdens on the Company, its officers and directors to take actions designed to insure compliance with applicable healthcare laws, including requirements to maintain specific compliance positions within the Company, to report any non-compliance with the terms of the CIA, to return any overpayments received, to submit annual reports and for an annual audit of submitted claims by an independent review organization. The CIA sets forth penalties for non-compliance by the Company with the terms of the agreement, including possible exclusion from federally funded healthcare programs for material violations of the agreement.

Other Insurance

With respect to workers’ compensation insurance, substantially all of the Company’s employees became covered under either a prefunded deductible policy or state-sponsored programs. The Company has been and remains a non-subscriber to the Texas workers’ compensation system and, therefore, is completely self-insured for employee injuries with respect to its Texas operations. From June 30, 2003 until June 30, 2007, the Company’s workers’ compensation insurance programs provided coverage for claims incurred with premium adjustments depending on incurred losses. From the period from July 1, 2008 through March 31, 2020, the Company is covered by a prefunded deductible policy. Under this policy, the Company is self-insured for the first $500 per claim, subject to an aggregate maximum of $3,000. The Company funds a loss fund account with the insurer to pay for claims below the deductible. The Company accounts for premium expense under this policy based on its estimate of the level of claims subject to the policy deductibles expected to be incurred. The liability for workers’ compensation claims is $944 and $921 at March 31, 2020 and December 31, 2019, respectively. The Company has a non-current receivable for workers’ compensation policies covering previous years of $1,666 and $1,575 as of March 31, 2020 and December 31, 2019, respectively. The non-current receivable is a function of payments paid to the Company’s insurance carrier in excess of the estimated level of claims expected to be incurred.

As of March 31, 2020, the Company is self-insured for health insurance benefits for certain employees and dependents for amounts up to $200 per individual annually. The Company provides reserves for the settlement of outstanding self-insured health claims at amounts believed to be adequate. The liability for reported claims and estimates for incurred but unreported claims is $1,747 at March 31, 2020. The differences between actual settlements and reserves are included in expense in the period finalized.


8.	STOCK-BASED COMPENSATION

Overview of Plans

In June 2008, the Company adopted the Advocat Inc. 2008 Stock Purchase Plan for Key Personnel (“Stock Purchase Plan”). The Stock Purchase Plan provides for the granting of rights to purchase shares of the Company's common stock to directors and officers. The Stock Purchase Plan allows participants to elect to utilize a specified portion of base salary, annual cash bonus, or director compensation to purchase restricted shares or restricted share units (“RSU's”) at 85% of the quoted market price of a share of the Company's common stock on the date of purchase. The restriction period under the Stock Purchase Plan is generally two years from the date of purchase and during which the shares will have the rights to receive dividends, however, the restricted share certificates will not be delivered to the shareholder and the shares cannot be sold, assigned or disposed of during the restriction

period. In June 2016, our shareholders approved an amendment to the Stock Purchase Plan to increase the number of shares of our common stock authorized under the Plan from 150 shares to 350 shares. No grants can be made under the Stock Purchase Plan after April 25, 2028.

In April 2010, the Compensation Committee of the Board of Directors adopted the 2010 Long-Term Incentive Plan (“2010 Plan”), followed by approval by the Company's shareholders in June 2010. The 2010 Plan allows the Company to issue stock appreciation rights, stock options and other share and cash based awards. In June 2017, our shareholders approved an amendment to the 2010 Plan to increase the number of shares of our common stock authorized under the 2010 Plan from 380 shares to 680 shares. No grants can be made under the 2010 Plan after May 31, 2027.

Equity Grants and Valuations

During the three months ended March 31, 2020 and 2019, the Compensation Committee of the Board of Directors approved grants totaling approximately 198 and 151 shares of restricted common stock respectively, to certain employees and members of the Board of Directors. The fair value of restricted shares is determined as the quoted market price of the underlying common shares at the date of the grant. The restricted shares typically vest one-third on the first, second and third anniversaries of the grant date. Unvested shares may not be sold or transferred. During the vesting period, dividends accrue on the restricted shares, but are paid in additional shares of common stock upon vesting, subject to the vesting provisions of the underlying restricted shares. The restricted shares are entitled to the same voting rights as other common shares. On March 13, 2020, the Compensation Committee of the Board of Directors approved the grant of 100 shares of common stock to the Company's Chief Executive Officer, as a one-time bonus in lieu of a 2020 salary increase and as recognition for completing the settlement with the Office of the Inspector General and the disposition of all of the Company's facilities in the State of Kentucky. The stock was fully vested on the date of the grant, and the grant date fair value of which was expensed during the quarter ended March 31, 2020.

In computing the fair value estimates for options and stock-only stock appreciation rights ("SOSARs") using the Black-Scholes-Merton valuation method, the Company took into consideration the exercise price of the equity grants and the market price of the Company's stock on the date of grant. The Company used an expected volatility that equals the historical volatility over the most recent period equal to the expected life of the equity grants. The risk free interest rate is based on the U.S. treasury yield curve in effect at the time of grant. The Company used the expected dividend yield at the date of grant, reflecting the level of annual cash dividends currently being paid on its common stock.

Upon vesting of equity awards, all restrictions are removed. Our policy is to account for forfeitures of share-based compensation awards as they occur.

Summarized activity of the equity compensation plans is presented below:



			Weighted
	Options/		Average
	SOSARs		Exercise Price
Outstanding, December 31, 2019	76		$	7.55
Granted	—		—
Exercised	—		—
Expired or cancelled	(1	)	5.45
Outstanding, March 31, 2020	75		$	7.58

Exercisable, March 31, 2020	75		$	7.58



			Weighted
			Average
	Restricted		Grant Date
	Shares		Fair Value
Outstanding, December 31, 2019	207		$	5.28
Granted	198		2.00
Vested	(188	)	3.93
Cancelled	(19	)	4.93
Outstanding, March 31, 2020	198		$	3.32

Summarized activity of the Restricted Share Units for the Stock Purchase Plan is as follows:



			Weighted
			Average
	Restricted		Grant Date
	Share Units		Fair Value
Outstanding, December 31, 2019	48		$	5.08
Granted	29		2.00
Vested	(13	)	8.11
Outstanding, March 31, 2020	64		$	3.05

The SOSARs and Options were valued and recorded in the same manner, and, other than amounts that may be settled pursuant to employment agreements with certain members of management, will be settled with issuance of new stock for the difference between the market price on the date of exercise and the exercise price. The Company estimated the total recognized and unrecognized compensation related to SOSARs and stock options using the Black-Scholes-Merton equity grant valuation model.

The following table summarizes information regarding stock options and SOSAR grants outstanding as of March 31, 2020:



	Weighted
	Average			Intrinsic			Intrinsic
Range of	Exercise		Grants	Value-Grants		Grants	Value-Grants
Exercise Prices	Prices		Outstanding	Outstanding		Exercisable	Exercisable
$8.14 to $10.21	$	8.83	45	$	—	45	$	—
$5.45 to $5.86	$	5.72	30	$	—	30	$	—
			75			75

Stock-based compensation expense is non-cash and is included as a component of general and administrative expense or operating expense based upon the classification of cash compensation paid to the related employees. The Company recorded total stock-based compensation expense of $338 and $140 in the three month periods ended March 31, 2020 and 2019, respectively.

9. INCOME TAXES

The Company recorded an income tax benefit from continuing operations of $104 during the three months ended March 31, 2020 and a benefit of $1,028 during the three months ended March 31, 2019.

When assessing the recoverability of the Company’s recorded deferred tax assets, the accounting guidance, ASC 740, Income Taxes, requires that all available positive and negative evidence be considered in evaluating the likelihood that the Company will be able to realize the benefit of its deferred tax assets in the future, which is highly judgmental. Such evidence includes, but may not be limited to, scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax-planning strategies, and the results of recent operations.

When assessing all available evidence, the Company recognized that governmental and regulatory changes have put downward revenue pressure on the long-term care industry as a piece of negative evidence in its analysis. In 2019 and 2018 combined, the Company recognized a total expense of $9.5 million related to the CID settlement in principle. Additionally, in 2017 it recorded

an additional $5.5 million of income tax expense related to the revaluation of deferred tax assets in accordance with the Tax Cuts and Jobs Act. Because of these items and other financial results, the Company entered a cumulative loss for the 36 preceding months ended June 30, 2019 and performed a thorough assessment of the available positive and negative evidence in order to ascertain whether it is more likely than not that in future periods the Company will generate sufficient pre-tax income to utilize all of its federal deferred tax assets and its net operating loss and other carryforwards and credits.

The Company also identified several pieces of positive evidence that were considered and weighed in the analysis performed regarding the valuation of deferred tax assets. The evidence included the termination of operations for 10 nursing facilities in Kentucky completed in the third quarter of 2019, the related corporate and regional restructuring and other cost saving initiatives already in process. The evidence also included consideration of participation in revenue incentive programs that are expected to generate additional revenue, the long-term expiration dates of a majority of the net operating losses and credits, and the Company’s history of not having carryforwards or credits expire unutilized.

In performing the analysis, the Company contemplated utilization of the recorded deferred tax assets under multiple scenarios. After consideration of these factors, the Company determined that a full valuation allowance of $20.0 million was necessary as of June 30, 2019. As of March 31, 2020, the Company has a valuation allowance in the amount of $21.5 million. The Company will continue to periodically assess the realizability of its future deferred tax assets.

On March 27, 2020, the CARES Act was enacted and signed into law. Certain provisions of the CARES Act impact the 2019 income tax provision computations of the Company and are reflected in the first quarter of 2020, or the period of enactment. The CARES Act contains modifications on the depreciation of qualified improvement property, as well as the limitation of business interest for tax years beginning in 2019 and 2020. The new life classification of the qualified improvement property, allowing for bonus depreciation to be taken, along with the modification to Section 163(j) to increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income significantly increased the allowable deductions of the Company and result in additional taxable losses for the year-ended 2019, resulting in greater net operating losses (“NOL”) to be carried back. The NOL carryback resulted in a tax refund of $321 and an increase to the Work Opportunity Tax Credit (“WOTC”) deferred tax asset, which is offset by a full valuation allowance. These changes pursuant to the CARES Act did not have a significant impact to the first quarter of 2020, other than the tax refund and net adjustments to the WOTC credit and NOL deferred tax assets, which are offset by a valuation allowance. As a result of the CARES Act, it is anticipated that the Company will fully utilize all interest expense expected to be incurred in 2020.

The Company is not currently under examination by any major income tax jurisdiction. During 2020, the statutes of limitations will lapse on the Company's 2016 Federal tax year and certain 2015 and 2016 state tax years. The Company does not believe the Federal or state statute lapses or any other event will significantly impact the balance of unrecognized tax benefits in the next twelve months. The net balance of unrecognized tax benefits was not material to the Interim Financial Statements for the three months ended March 31, 2020 and 2019.


10.	EARNINGS PER COMMON SHARE

Information with respect to basic and diluted net loss per common share is presented below in thousands, except per share:



	Three Months Ended March 31,
	2020			2019
Net loss
Loss from continuing operations	$	(510	)	$	(1,574	)
Loss from discontinued operations, net of income taxes	(243		)	(1,772		)
Net loss	$	(753	)	$	(3,346	)



	Three Months Ended March 31,
	2020			2019
Net loss per common share:
Per common share – basic
Loss from continuing operations	$	(0.08	)	$	(0.24	)
Loss from discontinued operations	(0.04		)	(0.28		)
Net loss per common share – basic	$	(0.12	)	$	(0.52	)
Per common share – diluted
Loss from continuing operations	$	(0.08	)	$	(0.24	)
Loss from discontinued operations	(0.04		)	(0.28		)
Net loss per common share – diluted	$	(0.12	)	$	(0.52	)
Weighted Average Common Shares Outstanding:
Basic	6,506			6,424
Diluted	6,506			6,424

The effects of 75 and 99 SOSARs and options outstanding were excluded from the computation of diluted earnings per common share in the three months ended March 31, 2020 and 2019, respectively, because these securities would have been anti-dilutive.


11.	BUSINESS DEVELOPMENTS AND OTHER SIGNIFICANT TRANSACTIONS

2018 New Master Lease Agreement

On August 30, 2019, the Company terminated operations of ten centers in Kentucky and concurrently transferred operations to a new operator. The agreement effectively amended the Lease with Omega Healthcare Investors to remove the ten Kentucky facilities, reduce the annual rent expense, and release the Company from any further obligations arising under the Lease with respect to the Kentucky facilities. The remaining Lease terms are unchanged with an initial term of twelve years and two optional 10-year extensions. The annual lease fixed escalator remains at 2.15% beginning on October 1, 2019.

Quality Incentive Payment Program

The Company recently expanded its participation in QIPP as administered by the Texas Health and Human Services Commission. QIPP provides supplemental Medicaid payments for skilled nursing centers that achieve certain quality measures. The Company previously had one of its Texas skilled nursing centers participating in the QIPP. During April 2019, the Company enrolled an additional eleven of its Texas skilled nursing centers in the program, such that twelve of the Company’s centers participate in the QIPP effective September 1, 2019. To allow four of these centers to meet the QIPP participation requirements, the Company entered into a transaction with a Texas medical district already participating in the QIPP, providing for the transfer of the provider license from the Company to the medical district. The Company’s operating subsidiary retained the management of the centers on behalf of the medical district.


12.	DISCONTINUED OPERATIONS

Kentucky Disposition

On October 30, 2018 the Company entered into an Asset Purchase Agreement (the "Agreement") with Fulton Nursing and Rehabilitation, LLC, Holiday Fulton Propco LLC, Birchwood Nursing and Rehabilitation LLC, Padgett Clinton Propco LLC, Westwood Nursing and Rehabilitation LLC, and Westwood Glasgow Propco (the "Buyers") to sell the assets and transfer the operations of the Kentucky Properties. On December 1, 2018, the Company completed the sale of the Kentucky Properties with the Buyers for a purchase price of $18,700. This transaction did not meet the accounting criteria to be reported as a discontinued

operation. The carrying value of these centers' assets was $13,331, resulting in a gain of $4,825, with remaining proceeds for miscellaneous closing costs. The proceeds were used to relieve debt, which is required under the terms of the Company's Amended Mortgage Loan and Amended Revolver. Refer to Note 5, "Long-term Debt and Interest Rate Swap" for more information on this transaction.

On May 22, 2019, the Company announced that it entered into an agreement with Omega to amend its master lease to terminate operations of ten nursing facilities, totaling approximately 885 skilled nursing beds, located in Kentucky and to concurrently transfer operations to an operator selected by Omega. On August 30, 2019, the Company completed the transaction and no longer operates any skilled nursing centers in the State of Kentucky. The Company's exit from the state represents a strategic shift that has (or will have) a major effect on the Company's operations and financial results. In accordance with ASC 205, the Company's discontinued financial position, results of operations and cash flows have been reclassified on the face of the financial statements and footnotes for all periods presented to reflect the discontinued status of these operations.

The transaction resulted in a gain on the modification of the Omega lease, which is presented within Discontinued Operations on the Consolidated Statements of Operations for the third quarter of 2019. The net gain on the transaction was $733.

These centers contributed revenues of $16,803 for the three months ended March 31, 2019 and net loss of $243 and $1,772 for the three months ended March 31, 2020 and 2019, respectively. The net loss for the nursing centers included in discontinued operations does not reflect any allocation of corporate general and administrative expense. The Company considered these additional costs along with the centers' future prospects based upon operating history when determining the contribution of the skilled nursing centers to its operations.

The Company did not transfer the accounts receivable or liabilities, inclusive of the reserves for professional liability and workers' compensation, to the new operator. The Company expects to collect the balance of the accounts receivable and pay the remaining liabilities in the ordinary course of business through its future operating cash flows.

13. SUBSEQUENT EVENTS

COVID-19

On March 27, 2020, the U.S. government enacted the CARES Act to provide relief during the COVID-19 pandemic. The CARES Act authorized $100 billion in funding to healthcare entities to be distributed through the Public Health and Social Services Emergency Fund ("PHSSEF"). Payments from PHSSEF are intended to compensate providers for lost revenues and healthcare-related expenses attributable to the COVID-19 pandemic. These payments are not required to be repaid, provided the recipients attest to and comply with certain terms and conditions, including not using PHSSEF funds to reimburse expenses or losses that other sources are obligated to reimburse. The Company will utilize these funds to pay for COVID-19 related expenses that includes but is not limited to increased wages and increased costs for personal protective equipment and other supplies.

In April, the Company received approximately $9,000 of Medicare stimulus funds and is expecting to receive an additional $700 in the second quarter of 2020. Additionally, the Families First Coronavirus Response Act provided states with a temporary increase in the regular federal matching rate, or federal medical assistance percentage, used to determine the federal government's share of the cost of covered services in state Medicaid programs, provided the states agreed to certain conditions such as not imposing cost-sharing requirements for COVID-19-related testing and treatment. The Company received $900 of Medicaid dollars related to this temporary increase in the federal matching rate, which related to March 2020 and is reflected in "patient revenues, net" in the Company's results of operations for the three month period ended March 31, 2020. Also, the Company has elected to participate in the payment deferral of employer payroll taxes during 2020.

Additional emergency appropriations are being made available to eligible providers under the Paycheck Protection Program and Health Care Enhancement Act ("PPPHCE Act"), which was enacted on April 24, 2020. These funds will be distributed through the PHSSEF. Recipients will not be required to repay the government for funds received, provided they comply with terms and conditions, which have not yet been finalized.

Since the end of the quarter, there have been additional cases of COVID-19 at certain of the Company's centers. The Company has continued to experience reduced occupancy and increased operating expenses at its centers in the form or increased wages and increased cost for personal protective equipment, food and certain other supplies. The Company expects such increased expenses to continue and likely increase further during the remainder of 2020.

Debt Amendment

Effective April 3, 2020, the Company entered into a Seventh Amendment ("Seventh Amendment") to amend the Amended Mortgage Loan, a Ninth Amendment ("Ninth Amendment") to amend the Amended Revolver and a Second Amendment ("Second Amendment") to the affiliated revolver. The Seventh Amendment removes the reserve of $2,100 on the Acquisition Loan availability, and therefore, our borrowing capacity is now $12,500. The Ninth Amendment and Second Amendment increases the

eligible days of qualifying accounts receivable from 120 days to 150 days for the purposes of calculating our borrowing capacity on the revolvers. The new LIBOR base rate is 0.5%.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

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 CARES Act

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, and limited waivers of fraud and abuse laws for activities related to COVID-19 during the emergency period. They also include requirements for skilled nursing centers to report to public health authorities, residents and their representatives when residents and staff are confirmed as having or are being investigated for having COVID-19.

One of the primary sources of relief for healthcare providers is the CARES Act, an economic stimulus package signed into law on March 27, 2020. The CARES Act includes $100 billion of funding to be distributed through the PHSSEF to eligible providers, including public entities and Medicare- and/or Medicaid-enrolled providers. PHSSEF payments are intended to compensate healthcare providers for lost revenues and healthcare-related expenses incurred in response to the COVID-19 pandemic and are not required to be repaid, provided that recipients attest to and comply with certain terms and conditions, including limitations on balance billing and not using PHSSEF funds to reimburse expenses or losses that other sources are obligated to reimburse.

In addition, the CARES Act expands the Medicare Accelerated and Advance Payment Program to increase cash flow to providers impacted by the COVID-19 pandemic. Skilled nursing centers may request an accelerated payment of up to 100% of the Medicare payment amount for a three-month period (not including Medicare Advantage payments), although CMS is now reevaluating pending and new applications in light of direct payments made available through the PHSSEF. The Medicare Accelerated and Advanced Payment Program payments are advances that providers must repay. CMS must recoup the accelerated payments beginning 120 days after receipt by the provider by withholding future Medicare payments for claims. Currently, the Company has not elected to participate in this program. The CARES Act also includes other provisions offering financial relief, for example lifting the Medicare sequester from May 1, 2020 through December 31, 2020, which would have otherwise reduced payments to Medicare providers by 2%.

In addition to the funds appropriated under the CARES Act, the PPPHCE Act, a stimulus package signed into law on April 24, 2020, includes additional emergency appropriations for COVID-19 response, including $75 billion to be distributed to eligible providers through the PHSSEF. This funding is also intended to reimburse providers for lost revenues and healthcare-related expenses attributable to the COVID-19 pandemic. Applicants for the funds will be required to submit a justification statement for the payments. Recipients will not be required to repay the government for funds received, provided they comply with terms and conditions, which have not yet been finalized.

Due to the recent enactment of the CARES Act and the PPPHCE Act, there is still a high degree of uncertainty surrounding their implementation, and the public health emergency continues to evolve. We continue to assess the potential impact of the CARES Act, the PPPHCE Act, the potential impact of other stimulus measures, if any, and the impact of other laws, regulations, and guidance related to COVID-19 on our business, results of operations, financial condition and cash flows.

Strategic Operating Initiatives

We identified several key strategic objectives to increase shareholder value through improved operations and business development. These strategic operating initiatives include: improving our facilities' quality metrics, improving skilled mix in our nursing centers, improving our average Medicare rate, implementing and maintaining Electronic Medical Records (“EMR”) to improve Medicaid capture, and completing strategic acquisitions and divestitures. We have experienced success in these initiatives and expect to continue to build on these improvements.

Improving skilled mix and average Medicare rate:

One of our key performance indicators is skilled mix. Our strategic operating initiatives of improving our skilled mix and our average Medicare rate required investing in nursing and clinical care to treat more acute patients along with nursing center-based marketing representatives to attract these patients. These initiatives developed referral and Managed Care relationships that have attracted and are expected to continue to attract payor sources for patients covered by Medicare and Managed Care. The Company's skilled mix for the three months ended March 31, 2020 and 2019 was 13.7% and 15.0%, respectively. 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 despite rate cuts in certain acuity based states by accurate and timely capture of care delivery.

Completing strategic transactions and other business developments:

Our strategic operating initiatives include a focus on completing strategic acquisitions and divestitures. We continue to pursue and investigate opportunities to acquire or lease new centers, focusing primarily on opportunities within our existing geographic areas of operation. As part of our strategic efforts, we routinely perform thorough analyses on our existing centers in order to determine whether continuing operations within certain markets or regions is in line with the short-term and long-term strategy of the business.

On December 1, 2018, the Company sold three Kentucky properties for a purchase price of $18.7 million, which are collectively referred to as the "Kentucky Properties." On August 30, 2019, the Company terminated operations of ten centers in Kentucky and concurrently transferred operations to a new operator. These ten centers are collectively referred to as the "Kentucky Centers." The sale of the Kentucky Properties and the termination of operations at the Kentucky Centers are referred to collectively as the "Kentucky Exit." As a result of the Kentucky Exit, the Company no longer operates any skilled nursing centers in the State of Kentucky. The Kentucky Exit represents a strategic shift that has (or will have) a major effect on the Company's operations and financial results. In accordance with ASC 205, the Company's discontinued operating results have been reclassified on the face of the financial statements and footnotes to reflect the discontinued status of these operations. Refer to Note 12, "Discontinued Operations" to the interim consolidated financial statements.

The Company recently expanded its participation in The Texas Quality Incentive Program ("QIPP") as administered by the Texas Health and Human Services Commission. QIPP provides supplemental Medicaid payments for skilled nursing centers that achieve certain quality measures. The Company previously had one of its Texas skilled nursing centers participating in the QIPP. During April 2019, the Company enrolled an additional eleven of its Texas skilled nursing centers in the program, such that twelve of the Company’s centers participate in the QIPP effective September 1, 2019. To allow four of these centers to meet the QIPP participation requirements, the Company entered into a transaction with a Texas medical district already participating in the QIPP, providing for the transfer of the related provider licenses from the Company to the medical district. The Company’s operating subsidiary retained the management of the centers on behalf of the medical district.

On October 1, 2018, the Company entered into a new Master Lease Agreement (the "Lease") with Omega Healthcare Investors (the "Lessor") to lease 34 centers currently owned by the Lessor and operated by Diversicare. The old Master Lease with the Lessor provided for its operation of 23 skilled nursing centers in Texas, Kentucky, Alabama, Tennessee, Florida, and Ohio. Additionally, Diversicare operated 11 centers owned by the Lessor under separate leases in Missouri, Kentucky, Indiana, and Ohio. The Lease entered into by Diversicare and the Lessor consolidates the leases for all 34 centers under one New Master Lease. The Lease has an initial term of twelve years with two optional 10 year extensions. The Lease has a common date of annual lease fixed escalators of 2.15% beginning on October 1, 2019. The Lease was subsequently amended on August 30, 2019 when the Company terminated operations of ten centers in Kentucky and concurrently transferred operations to a new operator. The agreement effectively amended the Lease to remove the ten Kentucky facilities, reduce the annual rent expense, and release the Company from any further obligations arising under the Lease with respect to the Kentucky facilities. The remaining Lease terms remain unchanged with an initial term of twelve years and two optional 10-year extensions. The annual lease fixed escalator remains at 2.15% beginning on October 1, 2019.

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 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 2019 Annual Report on Form 10-K.

Revenue Sources

We classify our revenues from patients and residents into four major categories: Medicaid, Medicare, Managed Care, and Private Pay and other. Medicaid revenues are composed of the traditional Medicaid program established to provide benefits to those in need of financial assistance in the securing of medical services. Medicare revenues include revenues received under both Part A and Part B of the Medicare program. Managed Care revenues include payments for patients who are insured by a third-party entity, typically called a Health Maintenance Organization, often referred to as an HMO plan, or are Medicare beneficiaries who assign their Medicare benefits to a Managed Care replacement plan often referred to as Medicare replacement products. The Private Pay and other revenues are composed primarily of individuals or parties who directly pay for their services. Included in the Private Pay and other payors are patients who are hospice beneficiaries as well as the recipients of Veterans Administration benefits. Veterans Administration payments are made pursuant to renewable contracts negotiated with these payors.

The following table sets forth net patient and resident revenues related to our continuing operations by primary payor source for the periods presented (dollar amounts in thousands).



	Three Months Ended March 31,
	2020				2019
Medicaid	$	54,330	45.3	%	$	53,811	45.8	%
Medicare	20,672		17.2	%	20,391		17.3	%
Managed Care	12,596		10.5	%	12,998		11.1	%
Private Pay and other	32,389		27.0	%	30,350		25.8	%
Total	$	119,987	100.0	%	$	117,550	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 March 31,
	2020			2019
Medicaid	3,818	68.2	%	3,877	68.2	%
Medicare	504	9.0	%	571	10.0	%
Managed Care	265	4.7	%	282	5.0	%
Private Pay and other	1,015	18.1	%	956	16.8	%
Total	5,602	100.0	%	5,686	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, there is considerable uncertainty regarding the future of the Affordable Care Act. The Presidential administration and certain members of Congress have made and expressed their intent to repeal or make additional significant changes to the law, its implementation or its interpretation. For example, effective January 1, 2019, Congress eliminated the financial penalty associated with the individual mandate. As a result of this change, a federal judge in Texas ruled in December 2018 that the individual mandate was unconstitutional and determined that the rest of the Affordable Care Act was, therefore, invalid. In December 2019, the Fifth Circuit Court of Appeals upheld this decision with respect to the individual mandate, but remanded for further consideration of how this affects the rest of the law. The law remains in place pending appeal.

Skilled nursing centers are required to bill Medicare on a consolidated basis for certain items and services that they furnish to patients, regardless of the cost to deliver these services. This consolidated billing requirement essentially makes the skilled nursing center responsible for billing Medicare for all care services delivered to the patient during the length of stay. CMS has instituted a number of test programs designed to extend the reimbursement and financial responsibilities under consolidating billing beyond the traditional discharge date to include a broader set of bundled services. Such examples may include, but are not exclusive to, home health, durable medical equipment, home and community based services, and the cost of re-hospitalizations during a specified bundled period. Currently, these test programs for bundled reimbursement are confined to a small set of clinical conditions, but CMS has indicated that it is developing additional bundled payment models. This bundled form of reimbursement could be extended to a broader range of diagnosis related conditions in the future. The potential impact on skilled nursing center utilization and reimbursement is currently unknown. The process for defining bundled services has not been fully determined by CMS and is therefore subject to change during the rulemaking process. CMS has indicated that it is working toward a unified payment system for post-acute care services, including those provided by skilled nursing centers.

On August 7, 2019, CMS issued a final rule outlining Medicare payment rates for skilled nursing facilities that became effective October 1, 2019. CMS projects that aggregate payments to skilled nursing facilities will increase by 2.4%, reflecting a Skilled nursing facility market basket percentage update of 2.8% with a 0.4 percentage point reduction for the multifactor productivity adjustment. In addition, the Patient-Driven Payment Model ("PDPM") took effect October 1, 2019. The PDPM is a payment system for patients in a covered Medicare Part A skilled nursing facility stay that replaces the Resource Utilization Group ("RUG-IV") model, which primarily used volume of services as the basis for payment classification. The PDPM model instead classifies patients into payment groups based on specific patient characteristics and shifts the focus away from paying for the volume of services provided. CMS will use a budget neutrality factor to satisfy the requirement that PDPM be budget neutral relative to RUG-IV. CMS stated that it intends for the new model not to change the aggregate amount of Medicare payments to skilled nursing facilities, but to more accurately reflect resource utilization.

On April 15, 2020, CMS published a proposed rule to update Medicare payment rates for skilled nursing facilities for fiscal year 2021. CMS projects that aggregate payments to skilled nursing facilities will increase by 2.3%, reflecting a skilled nursing facility market basket percentage update of 2.7% with a 0.4 percentage point reduction for the multifactor productivity adjustment.

CMS publishes rankings based on performance scores on the Nursing Home Compare website, which is intended to assist the public in finding and comparing skilled care providers. The Nursing Home Compare website also 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.

We remain diligent in continuing to provide outstanding patient care to achieve high rankings for our centers, as well as assuring that our rankings are correct and appropriately reflect our quality results. Our focus has been and continues to be on the delivery of quality care to our patients and residents.

Contractual Obligations and Commercial Commitments

We have certain contractual obligations of continuing operations as of March 31, 2020, summarized by the period in which payment is due, as follows (dollar amounts in thousands):



Contractual Obligations	Total		Less than 1 year		1 to 3 Years		3 to 5 Years		After 5 Years
Long-term debt obligations ⁽¹⁾	$	81,174	$	7,865	$	73,268	$	41	$	—
Settlement obligations ⁽²⁾	3,226		2,903		323		—		—
Settlement of civil investigative demand ⁽³⁾	9,732		1,203		2,838		5,691		—
Operating leases ⁽⁴⁾	451,105		51,073		105,135		107,913		186,984
Required capital expenditures under operating leases ⁽⁵⁾	17,744		2,042		4,082		4,082		7,538
Total	$	562,981	$	65,086	$	185,646	$	117,727	$	194,522

(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 $0.1 million between December 31, 2019 and March 31, 2020. See Note 5, "Long-Term Debt and Interest Rate Swap," to the interim consolidated financial statements included in this report for additional information.


(2)	Settlement obligations relate to professional liability cases that are expected to be paid within the next twelve months. The professional liabilities are included in our current portion of self-insurance reserves.


(3)	Settlement of civil investigative demand relates to our settlement agreement, including interest, with the U.S. Department of Justice and the State of Tennessee. See additional description of our contingencies in Note 7 "Commitments and Contingencies" to the interim consolidated financial statements and "Item 1. Legal Proceedings."

(4)

Represents minimum annual undiscounted lease payments (exclusive of taxes, insurance, and maintenance costs) under our operating lease agreements, which does not include renewals. Our operating lease obligations decreased $12.6 million between December 31, 2019 and March 31, 2020. See Note 6, "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 $1.0 million between December 31, 2019 and March 31, 2020.

Employment Agreements

We have employment agreements with certain members of management that provide for the payment to these members of amounts up to two times their annual salary in the event of a termination without cause, a constructive discharge (as defined therein), or upon a change of control of the Company (as defined therein). The maximum contingent liability under these agreements is approximately $1.6 million as of March 31, 2020. 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-month periods ended March 31, 2020 and 2019:



(in thousands)	Three Months Ended March 31,
	2020			2019			Change			%
PATIENT REVENUES, net	$	119,987		$	117,550		$	2,437		2.1	%
EXPENSES:
Operating	94,859			94,422			437			0.5	%
Lease and rent expense	13,512			13,115			397			3.0	%
Professional liability	1,839			1,851			(12		)	(0.6	)%
General and administrative	6,758			7,213			(455		)	(6.3	)%
Depreciation and amortization	2,288			2,317			(29		)	(1.3	)%
Total expenses	119,256			118,918			338			0.3	%
OPERATING INCOME (LOSS)	731			(1,368		)	2,099			N/M
OTHER INCOME (EXPENSE):
Other income	115			160			(45		)	(28.1	)%
Interest expense, net	(1,460		)	(1,394		)	(66		)	(4.7	)%
Total other expenses	(1,345		)	(1,234		)	(111		)	(9.0	)%
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(614		)	(2,602		)	1,988			76.4	%
BENEFIT FOR INCOME TAXES	104			1,028			(924		)	(89.9	)%
LOSS FROM CONTINUING OPERATIONS	$	(510	)	$	(1,574	)	$	1,064		67.6	%

N/M = Not Meaningful



Percentage of Net Revenues	Three Months Ended March 31,
	2020		2019
PATIENT REVENUES, net	100.0	%	100.0	%
EXPENSES:
Operating	79.1		80.3
Lease and rent expense	11.3		11.2
Professional liability	1.5		1.6
General and administrative	5.6		6.1
Depreciation and amortization	1.9		2.0
Total expenses	99.4		101.2
OPERATING LOSS	0.6		(1.2	)
OTHER INCOME (EXPENSE):
Other income	0.1		0.1
Interest expense, net	(1.1	)	(1.1	)
Total other expenses	(1.0	)	(1.0	)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(0.4	)	(2.2	)
BENEFIT FOR INCOME TAXES	0.1		0.9
LOSS FROM CONTINUING OPERATIONS	(0.3	)%	(1.3	)%

Three Months Ended March 31, 2020 Compared To Three Months Ended March 31, 2019

Patient Revenues

Patient revenues were $120.0 million and $117.6 million for the three months ended March 31, 2020 and 2019, respectively, an increase of $2.4 million.

Our Medicaid rate for the first quarter of 2020 increased 1.1% resulting in a revenue increase of $1.5 million, and we recognized a Medicaid related stimulus of $0.9 million. Our Medicare rate for the first quarter of 2020 increased 7.4% resulting in a revenue increase of $1.5 million. Our Hospice average daily census for the first quarter of 2020 increased 27.2% resulting in $2.0 million in additional revenue. Conversely, our Medicare, Private, and Medicaid average daily census for the first quarter of 2020 decreased 12.0%, 12.8%, and 1.5%, respectively, resulting in revenue losses of $2.8 million, $1.1 million, and $1.0 million, respectively. The decline in census for the first quarter of 2020 was due in large part to the impact of the COVID-19 pandemic. The QIPP resulted in $1.5 million in additional revenues for the first quarter of 2020 compared to the first quarter of 2019. An additional day of revenue for the first quarter of 2020 compared to the first quarter of 2019 resulted in $1.3 million in additional revenue.

The following table summarizes key revenue and census statistics for continuing operations for each period:



	Three Months Ended March 31,
	2020			2019
Skilled nursing occupancy	76.4		%	77.6		%
As a percent of total census:
Medicare census	9.0		%	10.0		%
Medicaid census	68.2		%	68.2		%
Managed Care census	4.7		%	5.0		%
As a percent of total revenues:
Medicare revenues	17.2		%	17.3		%
Medicaid revenues	45.3		%	45.8		%
Managed Care revenues	10.5		%	11.1		%
Average rate per day:
Medicare	$	487.01		$	453.63
Medicaid	$	181.31		$	179.37
Managed Care	$	391.34		$	393.09

Operating Expense

Operating expense increased in the first quarter of 2020 to $94.9 million from $94.4 million in the first quarter of 2019, an increase of $0.5 million. Operating expense decreased as a percentage of revenue to 79.1% for the first quarter of 2020 as compared to 80.3% for the first quarter of 2019.

One of the largest components of operating expenses is wages, which increased to $57.3 million in the first quarter of 2020 from $56.6 million in the first quarter of 2019. The Company incurred an additional $0.4 million of salaries expense and $0.1 million of supplies expense related to the COVID-19 pandemic during the first quarter of 2020.

Lease Expense

Lease expense in the first quarter of 2020 increased to $13.5 million as compared to $13.1 million in the first quarter of 2019. The increase in lease expense was due to rent increases resulting from the amendment to the Lease with Omega Healthcare Investors in conjunction with the Kentucky Exit.

Professional Liability

Professional liability expense was $1.8 million and $1.9 million in the first quarters of 2020 and 2019, respectively. Our cash expenditures for professional liability costs, including the State of Kentucky, were $1.8 million and $1.9 million for the first quarters of 2020 and 2019, 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 $6.8 million for the first quarter of 2020 compared to $7.2 million for the first quarter of 2019, a decrease of $0.4 million or 6.3%. The decrease in general and administrative expenses is mainly attributable to a decrease in legal fees of $0.6 million.

Depreciation and Amortization

Depreciation and amortization expense remained consistent at $2.3 million in the first quarters of 2019 and 2020 .

Interest Expense, Net

Interest expense was $1.5 million in the first quarter of 2020 and $1.4 million in the first quarter of 2019. The increase of $0.1 million is due to an increase in the outstanding borrowings on our loan facilities.

Income Tax Benefit

The Company recorded an income tax benefit of $0.1 million during the first quarter of 2020 and an income tax benefit of $1.0 million during the first quarter of 2019.

Loss from Continuing Operations before Income Taxes; Loss from Continuing Operations per Common Share

As a result of the above, continuing operations reported a loss of $0.6 million before income taxes for the first quarter of 2020 as compared to a loss of $2.6 million for the first quarter of 2019. Both basic and diluted loss per common share from continuing operations were $0.08 for the first quarter of 2020 as compared to both basic and diluted loss per common share from continuing operations of $0.24 in the first quarter of 2019.

COVID-19 Impact on Continuing Operations

The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business. In April, the Company received $9,000 of Medicare stimulus funds and is expecting to receive an additional $700 in the second quarter of 2020. Additionally, the Families First Coronavirus Response Act provided states with a temporary increase in the regular federal matching rate, or federal medical assistance percentage, used to determine the federal government's share of the cost of covered services in state Medicaid programs, provided the states agreed to certain conditions such as not imposing cost-sharing requirements for COVID-19-related testing and treatment. The Company received $900 of Medicaid dollars related to this temporary increase in the federal matching rate, which related to March 2020 and is reflected in "patient revenues, net" in the Company's results of operations for the three month period ended March 31, 2020.

The Company expects to receive additional stimulus funds under the CARES Act and/or the PPHCE Act in the second quarter of 2020. Additionally, the Company has decided to participate in the payment deferral of employer payroll taxes during 2020. The CARES Act expands the Medicare Accelerated and Advance Payment Program to increase cash flow to providers impacted by the COVID-19 pandemic. Currently, the Company has not elected to participate in this program.

Since the end of the quarter, there have been additional cases of COVID-19 at certain of our centers. The Company has continued to experience reduced occupancy and increased operating expenses at its centers in the form or increased wages and increased

cost for personal protective equipment, food and certain other supplies. The Company expects such increased expenses to continue and likely increase further during the remainder of 2020. See Note 13 “Subsequent Events” to the interim consolidated financial statements included in this report for additional information.

Liquidity and Capital Resources

Liquidity

Our primary sources of liquidity are the net cash flow provided by the operating activities of our centers and draws on our revolving credit facility. We believe that these internally generated cash flows will be adequate to service existing debt obligations and fund required capital expenditures for twelve months after the date of issuance of these interim financial statements. In determining priorities for our cash flow, we evaluate alternatives available to us and select the ones that we believe will most benefit us over the long-term. Options for our use of cash include, but are not limited to, capital improvements, purchase of additional shares of our common stock, acquisitions, payment of existing debt obligations as well as initiatives to improve nursing center performance. We review these potential uses and align them to our cash flows with a goal of achieving long-term success.

Net cash provided by operating activities of continuing operations totaled $2.7 million for the three months ended March 31, 2020, compared to net cash provided by operating activities of continuing operations of $1.9 million in the same period of 2019. The primary driver of the increase in cash provided by operating activities from continuing operations was an improvement in our net loss, which was $0.5 million for the three months ended March 31, 2020, compared to a net loss of $1.6 million for the three months ended March 31, 2019. The increase was slightly offset by a decrease in collections of accounts receivables.

Our cash expenditures related to professional liability claims of continuing operations were $1.8 million and $1.9 million for the three months ended March 31, 2020 and 2019, 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 $0.9 million and $1.2 million for the three months ended March 31, 2020 and 2019, respectively. The decrease in cash used for investing activities relates to a reduction of capital expenditures.

Financing activities of continuing operations used cash of nearly zero and provided cash of $0.9 million for the three months ended March 31, 2020 and 2019, respectively. The decrease is primarily due to the decrease in net repayments of $1.0 million.

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 did not incur significant disruptions during the three months ended March 31, 2020 from 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. We expect the CARES Act and PPPHCE Act to result in additional stimulus funds during the second quarter 2020, but we also expect to incur less revenue and increased operating expenses as a result of COVID-19. The increased operating expenses are expected to include increased wages and the increased cost of food, personal protective equipment, infection control supplies and dietary supplies.

Professional Liability

The Company has professional liability insurance coverage for its nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a wholly-owned, offshore limited purpose insurance subsidiary, SHC, which has issued a policy insuring claims made against all of the Company's nursing centers in Florida and Tennessee, and several of the Company's nursing centers in Alabama, Kentucky, Ohio, and Texas. The insurance coverage provided for these centers under the SHC policy provides coverage limits of at least $1,000 per medical incident with a sublimit per center of $3,000 and total annual aggregate policy limits of $5,000. All other centers within the Company's portfolio are covered through various commercial insurance policies which provide similar coverage limits per medical incident, per location, and on an aggregate basis for covered centers. The deductibles for these policies are covered through the insurance subsidiary.

As of March 31, 2020, we have recorded total liabilities for reported and settled professional liability claims and estimates for incurred, but unreported claims of $26.4 million. Our calculation of this estimated liability is based on the Company's best estimate of the likelihood of adverse judgments with respect to any asserted claim; however, a significant judgment could be entered against us in one or more of these legal actions, and such a judgment could have a material adverse impact on our financial position and cash flows.

Capital Resources

As of March 31, 2020, we had $75.4 million of outstanding long-term debt and finance lease obligations. The $75.4 million total includes $0.7 million in finance lease obligations and $15.0 million currently outstanding on the revolving credit facility. The balance of the long-term debt is comprised of $58.6 million owed on our mortgage loan, which includes $49.2 million on the term loan facility and $9.4 million on the acquisition loan facility.

On February 26, 2016, the Company executed an Amended and Restated Credit Agreement (the "Credit Agreement") with a syndicate of banks, which consists of a $80.0 million mortgage loan subsequently amended ("Amended Mortgage Loan") and a $52.3 million revolver subsequently amended ("Amended Revolver"). The Amended Mortgage Loan and Amended Revolver both have a five-year maturity through September 30, 2021. The Amended Mortgage Loan consists of $67.5 million term and $12.5 million acquisition loan facilities. The Amended Mortgage Loan has a term of five years, with principal and interest payable monthly based on a 25-year amortization. Interest on the term and acquisition loan facilities is based on LIBOR plus 4.0% and 4.75%, respectively. A portion of the Amended Mortgage Loan is effectively fixed at 5.79% pursuant to an interest rate swap with an initial notional amount of $30.0 million. The Amended Mortgage Loan balance was $58.6 million as of March 31, 2020, consisting of $49.2 million on the term loan facility with an interest rate of 5.75% and $9.4 million on the acquisition loan facility with an interest rate of 6.50%. The Amended Mortgage Loan is secured by fifteen owned nursing centers, related equipment and a lien on the accounts receivable of these centers. The Amended Mortgage Loan and the Amended Revolver are cross-collateralized and cross-defaulted. The Company’s Amended Revolver has an interest rate of LIBOR plus 4.0% and is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions.

In connection with the sale of the Kentucky Properties, the Company entered into the Sixth Amendment ("Sixth Revolver Amendment") to amend the Amended Revolver effective December 1, 2018. The Sixth Amendment decreased the Amended Revolver capacity from $52.3 million to $42.3 million. The Company also applied $4.9 million of net proceeds from the sale of the Kentucky Properties to the outstanding borrowings under the Amended Revolver.

Also effective December 1, 2018, the Company executed a Fourth Amendment (the "Fourth Term Amendment") to amend the Amended Mortgage Loan. The Company applied $11.1 million and $2.1 million of net proceeds from the sale of the Kentucky Properties to the Term Loan and Acquisition Loan, respectively. Additionally, we amended the Acquisition Loan availability to include a reserve of $2.1 million, and therefore, our borrowing capacity is $10.4 million. On April 3, 2020, the Company entered into an agreement to amend the Amended Mortgage Loan, which removes the $2.1 million reserve and increases our borrowing capacity to $12.5 million. See Note 13, "Subsequent Events" for further discussion on the amended debt agreement.

The Company is participating in the Texas Quality Incentive Payment Program ("QIPP"). Effective May 13, 2019, the Company entered into a Fifth Amendment (the “Fifth Term Amendment”) to amend the Amended Mortgage Loan to release the operators of three of the QIPP centers in Texas from the Amended Mortgage Loan and a Seventh Amendment (the “Seventh Revolver Amendment”) to amend the Amended Revolver to remove the operators of four of the QIPP centers in Texas from the Amended Revolver and to permanently reduce the amount available under the Amended Revolver by $2.0 million. At the same time, the operators of these four facilities entered into a separate revolving loan (the "affiliated revolver") with the same syndicate of banks to provide for the temporary working capital requirements of the four QIPP centers. The affiliated revolver, which is guaranteed by the Company, has an initial capacity of $5.0 million, which amount is reduced by $1.0 million on each of January 1, 2020, April 1, 2020 and July 1, 2020. The affiliated revolver has the same maturity date as the Amended Revolver and the Amended Mortgage Loan of September 30, 2021. The affiliated revolver is cross-defaulted with the Amended Revolver and the Amended Mortgage Loan. For further discussion of the QIPP centers in Texas, refer to Note 11, "Business Development and Other Significant Transactions." As of March 31, 2020, the Company had $1.0 million borrowings outstanding under the affiliated revolver. The interest rate related to the affiliated revolver was 5.75% as of March 31, 2020. The balance available for borrowing under the affiliated revolver was $0.2 million at March 31, 2020.

As of March 31, 2020, the Company had $15.0 million borrowings outstanding under the Amended Revolver compared to $15.0 million outstanding as of December 31, 2019. The interest rate related to the Amended Revolver was 5.75% as of March 31, 2020. The outstanding borrowings on the revolver were used primarily for temporary working capital requirements. Annual fees for letters of credit issued under the Amended Revolver are 3.00% of the amount outstanding. The Company has four letters of credit with a total value of $12.1 million outstanding as of March 31, 2020. Considering the balance of eligible accounts receivable, the letters of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of $32.1 million, the balance available for borrowing under the Amended Revolver and affiliated revolver was $4.0 million at March 31, 2020.

Our lending agreements contain various financial covenants, the most restrictive of which relates to debt service coverage ratios. We are in compliance with all such covenants at March 31, 2020.

Our calculated compliance with financial covenants is presented below:



	Requirement	Level at March 31, 2020
Credit Facility:
Minimum fixed charge coverage ratio	1.01:1.00	1.14:1.00
Minimum adjusted EBITDA	$3.3 million	$3.9 million
Current ratio (as defined in agreement)	1.00:1.00	1.21:1.00
Affiliated Revolver:
Minimum fixed charge coverage ratio	1.00:1.00	2.13:1.00
Minimum adjusted EBITDA	$0.8 million	$1.2 million
Mortgaged Centers:
EBITDAR	$10.0 million	$14.2 million

As part of our debt agreements, we have an interest rate swap agreement with a member of the bank syndicate as the counterparty. The interest rate swap agreement has the same effective date and maturity date as the Amended Mortgage Loan, and carries an initial notional amount of $30.0 million. The interest rate swap agreement requires us to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of 5.79% while the bank is obligated to make payments to us based on LIBOR on the same notional amounts. We entered into the interest rate swap agreement to mitigate the variable interest rate risk on our outstanding mortgage borrowings.

Off-Balance Sheet Arrangements

We have four letters of credit outstanding with an aggregate value of approximately $12.1 million as of March 31, 2020. 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.

Exchange Listing

As previously disclosed, on June 19, 2019, the Company received written notification from Nasdaq stating that the Company’s Common Stock was subject to delisting from Nasdaq, pending the Company’s opportunity to request a hearing before the Nasdaq Hearings Panel. The Company appealed the Notification on August 22, 2019. On August 27, 2019, the Company was notified by the Panel that it denied the Company’s appeal and determined to delist the Company’s Common Stock from the Nasdaq Capital Market. Accordingly, the trading of the Company’s Common Stock was suspended on the Nasdaq Capital Market at the opening of business on August 29, 2019 and the Company's Common stock began trading on the OTCQX under the trading symbol "DVCR." On October 11, 2019 Nasdaq filed a Form 25 with the Securities & Exchange Commission to effect the formal delisting of the Company’s common stock from the Nasdaq Capital Market, which became effective October 21, 2019. The Form 25 filing did not cause the removal of any shares of the Company’s common stock from registration under the Exchange Act. The Company remains subject to the periodic reporting requirements of the Exchange Act. Delisting from Nasdaq may adversely affect our ability to raise additional financing through the public or private sale of equity securities.

Forward-Looking Statements

The foregoing discussion and analysis provides information deemed by management to be relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion and analysis should be read in conjunction with our interim consolidated financial statements included herein. Certain statements made by or on behalf of us, including those contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by the forward-looking statements made herein. Forward-looking statements are predictive in nature and are frequently identified by the use of terms such as "may," "will," "should," "expect," "believe," "estimate," "intend," and similar words indicating possible future expectations, events or actions. In addition to any assumptions and other factors referred to specifically in connection with such statements, other factors, many of which are beyond our ability to control or predict, could cause our actual results to differ materially from the results expressed or implied in any forward-looking statements including, but not limited to:


•	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 new Patient-Driven Payment Model that was in October of 2019,


•	government regulation,


•	the impact of the Affordable Care Act, efforts to repeal or further modify the Affordable Care Act, and other health care reform initiatives,


•	any increases in the cost of borrowing under our credit agreements,


•	our ability to comply with covenants contained in those credit agreements,


•	our ability to comply with the terms of our master lease agreements,


•	our ability to renew or extend our leases at or prior to the end of the existing lease terms,


•	the outcome of professional liability lawsuits and claims,


•	our ability to control ultimate professional liability costs,


•	the accuracy of our estimate of our anticipated professional liability expense,


•	the impact of future licensing surveys,


•	the outcome of proceedings alleging violations of state or Federal False Claims Acts,


•	laws and regulations governing quality of care or other laws and regulations applicable to our business including HIPAA and laws governing reimbursement from government payors,


•	the costs of investing in our business initiatives and development,


•	our ability to control costs,


•	our ability to attract and retain qualified healthcare professionals,


•	changes to our valuation of deferred tax assets,


•	changing economic and competitive conditions,


•	changes in anticipated revenue and cost growth,


•	changes in the anticipated results of operations,


•	the effect of changes in accounting policies as well as others.

Concerns are rapidly growing about the global outbreak of COVID-19. The disease has spread rapidly across the globe, including the U.S. The pandemic is having an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties. These uncertainties include, but are not limited to, the potential adverse effect of the pandemic on the economy, our patients and residents and supply chain.

The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict, as the response to the pandemic is in its incipient stages and information is rapidly evolving. Capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and economy as a whole. The magnitude and overall effectiveness of these actions remains uncertain.

The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's patients and residents, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, 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, as well as changes to the skilled mix of our centers. As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company's financial condition, liquidity, or results of operations is uncertain.

Investors also should refer to the risks identified in this “Management's Discussion and Analysis of Financial Condition and Results of Operations” as well as risks identified in “Part I. Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2019 and in "Part II. Item 1A. Risk Factors" below, for a discussion of various risk factors of the Company and that are inherent in the health care industry. Given these risks and uncertainties, we can give no assurances that these forward-looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them. These assumptions may not materialize to the extent assumed, and risks and uncertainties may cause actual results to be different from anticipated results. These risks and uncertainties also may result in changes to the Company’s business plans and prospects. Such cautionary statements identify important factors that could cause our actual results to materially differ from those projected in forward-looking statements. In addition, we disclaim any intent or obligation to update these forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The chief market risk factor affecting our financial condition and operating results is interest rate risk. As of March 31, 2020, we had outstanding borrowings of approximately $74.6 million, $48.1 million of which was subject to variable interest rates. In connection with our February 2016 financing agreement, we entered into an interest rate swap with an initial notional amount of $30.0 million to mitigate the floating interest rate risk of a portion of such borrowing. In the event that interest rates were to change 1%, the impact on future pre-tax cash flows would be approximately $0.5 million annually, representing the impact of increased or decreased interest expense on variable rate debt.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), our management, including our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of March 31, 2020. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, such as this Quarterly Report on Form 10-Q, is properly recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission’s rules and forms. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures that, by their nature, can provide only reasonable assurance regarding management’s control objectives. Management does not expect that its disclosure controls and procedures will prevent all errors and fraud. A control system, irrespective of how well it is designed and operated, can only provide reasonable assurance, and cannot guarantee that it will succeed in its stated objectives.

Based on an evaluation of the effectiveness of the design and operation of disclosure controls and procedures, our chief executive officer and chief financial officer concluded that, as of March 31, 2020, our disclosure controls and procedures were effective in reaching a reasonable level of assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms.

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The provision of health care services entails an inherent risk of liability. Participants in the health care industry are subject to lawsuits alleging malpractice, negligence, violations of false claims acts, product liability, or related legal theories, many of which involve large claims and significant defense costs. Like many other companies engaged in the long-term care profession in the United States, we have numerous pending liability claims, disputes and legal actions for professional liability and other related issues. It is expected that we will continue to be subject to such suits as a result of the nature of our business. Further, as with all health care providers, we are periodically subject to regulatory actions seeking fines and penalties for alleged violations of health care laws and are potentially subject to the increased scrutiny of regulators for issues related to compliance with health care fraud and abuse laws and with respect to the quality of care provided to residents of our facilities. Like other health care providers, in the ordinary course of our business, we are also subject to claims made by employees and other disputes and litigation arising from the conduct of our business.

As of March 31, 2020, we are engaged in 98 professional liability lawsuits. Fifteen lawsuits are currently scheduled for trial or arbitration during the next twelve months, and it is expected that additional cases will be set for trial or hearing. The ultimate results of any of our professional liability claims and disputes cannot be predicted. We have limited, and sometimes no, professional liability insurance with regard to most of these claims. A significant judgment entered against us in one or more of these legal actions could have a material adverse impact on our financial position and cash flows.

In February 2020, we entered into a settlement agreement with the U.S. Department of Justice and the State of Tennessee of actions alleging violations of the federal False Claims Act in connection with our provision of therapy and the completion of certain resident admission forms. This settlement resolved an investigation that had begun in 2012 and covers the time period from January 1, 2010 through December 31, 2015. This agreement requires material annual payments for a period of five years ending in February 2025 and also requires a contingent payment in the event the Company sells any of its owned facilities during the five year payment period. Failure to make timely any of these payments could result in rescission of the settlement and result in the government having a very large claim against us, including penalties, and/or make us ineligible to participate in certain government funded healthcare programs, any of which could in turn significantly harm our business and financial condition.

In conjunction with the settlement of the government investigation related to our therapy practices, we entered into the CIA with the Office of the Inspector General of CMS. The CIA has a term of five years and imposes material burdens on the Company, its officers and directors to take actions designed to insure compliance with applicable healthcare laws, including requirements to maintain specific compliance positions within the Company, to report any non-compliance with the terms of the CIA, to return any overpayments received, to submit annual reports and for an annual audit of submitted claims by an independent review organization. The CIA sets forth penalties for non-compliance by the Company with the terms of the agreement, including possible exclusion from federally funded healthcare programs for material violations of the CIA.

In January 2009, a purported class action complaint was filed in the Circuit Court of Garland County, Arkansas against the Company and certain of its subsidiaries and Garland Nursing & Rehabilitation Center (the “Center”). The Company answered the original complaint in 2009, and there was no other activity in the case until May 2017. At that time, plaintiff filed an amended complaint asserting new causes of action. The amended complaint alleges that the defendants breached their statutory and contractual obligations to the patients of the Center over a multi-year period by failing to meet minimum staffing requirements, failing to otherwise adequately staff the Center and failing to provide a clean and safe living environment in the Center. The Company filed an answer to the amended complaint denying plaintiffs’ allegations and asked the Court to dismiss the new causes of action asserted in the amended complaint because the Company was prejudiced by plaintiff’s long delay in filing the amended complaint. The Court has not yet ruled on the motion to dismiss, so the lawsuit remains in its early stages and has not yet been certified by the court as a class action. The Company intends to defend the lawsuit vigorously.

We cannot currently predict with certainty the ultimate impact of any of the above cases on our financial condition, cash flows or results of operations. An unfavorable outcome in any of these lawsuits, any of our professional liability actions, any regulatory action, or any investigation or lawsuit alleging violations of fraud and abuse laws or of elderly abuse laws or any state or Federal False Claims Act law could subject us to fines, penalties and damages, including exclusion from the Medicare or Medicaid programs, and could have a material adverse impact on our financial condition, cash flows or results of operations.

ITEM 1A. RISK FACTORS.

In addition to the other information set forth in this report, you should carefully consider the risks and uncertainties discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be not material also may materially and adversely affect our business, financial condition and/or operating results. We are including the following revised risk factors, which update and supersede the corresponding risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, and adding new risk factors, both which should be read in conjunction with our description of risk factors in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2019:

Disasters and similar events may seriously harm our business.

Natural and man-made disasters, pandemics or epidemics, including terrorist attacks and acts of nature such as hurricanes, tornados, earthquakes and wildfires, may cause damage or disruption to us, our employees and our centers, which could have an adverse impact on our patients and our business. Our affiliated facilities in Kansas, Missouri, Mississippi, Florida, Alabama and Texas may be more susceptible to damage caused by natural disasters including hurricanes, tornadoes and flooding. In order to provide care for our patients, we are dependent on consistent and reliable delivery of food, pharmaceuticals, utilities and other goods to our centers, and the availability of employees to provide services at our centers. If the delivery of goods or the ability of employees to reach our centers were interrupted in any material respect due to a natural disaster, pandemic or other reasons, it would have a significant impact on our centers and our business. Furthermore, the impact, or impending threat, of a natural disaster has in the past and may in the future require that we evacuate one or more centers, which would be costly and would involve risks, including potentially fatal risks, for the patients. The impact of disasters, pandemics and similar events is inherently uncertain. Such events could harm our patients and employees, severely damage or destroy one or more of our centers, harm our business, reputation and financial performance, or otherwise cause our business to suffer in ways that we currently cannot predict.

The COVID-19 outbreak has disrupted many aspects of the economy and our industry and it is unclear what the ultimate impact on our business will be. Federal, state and local governments and health departments have taken a number of unprecedented actions as precautionary measures to avoid the spread of COVID-19 and may take additional steps. Governments have implemented social distancing requirements which have caused, and may continue to cause patients to postpone or refuse necessary care in an attempt to avoid possible exposure, thereby reducing occupancy. Restrictions or limitations on admissions to our centers by such agencies would have a negative impact on us. Residents in our centers that have tested positive for COVID-19 have caused an increase in the costs of caring for the residents in that center and may cause a reduced occupancy at those centers. We have also incurred additional expenditures preparing our centers for potential outbreaks and providing care to our residents during this period of isolation. The COVID-19 outbreak has caused our centers and our management to spend considerable time planning, which diverts their attention from other business concerns. We are continuing to evaluate and consider the potential impact of the COVID-19 outbreak, which could result in these or other negative outcomes and adversely impact our business, operating results and financial condition. There can be no assurances that COVID-19 or another pandemic, epidemic or outbreak of a contagious illness, will not have a material and adverse impact on our business, operating results and financial condition in the future.

There is a high degree of uncertainty regarding the implementation and impact of the CARES Act, the PPPHCE Act, and future stimulus legislation, if any. There can be no assurance as to the total amount of financial assistance or types of assistance we will receive, that we will be able to benefit from provisions intended to increase access to resources and ease regulatory burdens for healthcare providers or that additional stimulus legislation will be enacted.

The CARES Act is a $2 trillion economic stimulus package signed into law on March 27, 2020, in response to the COVID-19 pandemic. In an effort to stabilize the U.S. economy, the CARES Act provides for cash payments to individuals and loans and grants to small businesses, among other measures. For hospitals and other healthcare providers, it authorizes $100 billion in funding to be distributed through the PHSSEF. These funds are intended to reimburse eligible providers, including public entities and Medicare- and/or Medicaid-enrolled providers and suppliers, for healthcare-related expenses or lost revenues attributable to COVID-19. Recipients are not required to repay these funds to the government, provided that they attest to and comply with certain terms and conditions, including limitations on balance billing and not using PHSSEF funds to reimburse expenses or losses that other sources are obligated to reimburse. [HHS allocated half of the provider relief funding for general distribution to Medicare providers impacted by COVID-19. HHS distributed $50 billion of this funding based on each provider’s reimbursement allocated proportional share of Medicare net patient revenue. HHS has indicated that distributions of the remaining $50 billion will be targeted primarily to hospitals in areas particularly impacted by the COVID-19 pandemic, rural providers, and to reimburse providers that submit claim requests for COVID-19-related treatment of uninsured patients at Medicare rates. HHS has also indicated that some providers will receive further, separate funding, including skilled nursing facilities and providers that take solely Medicaid.]

The CARES Act also makes other forms of financial assistance available to healthcare providers, including through Medicare and Medicaid payments adjustments and an expansion of the Medicare Accelerated and Advance Payment Program, which makes available accelerated payments of Medicare funds in order to increase cash flow to providers. In addition to financial assistance, the CARES Act includes provisions intended to increase access to medical supplies and equipment and ease legal and regulatory burdens on healthcare providers. Many of these measures, such as flexibilities related to the provision of telehealth services and waiver of the requirement for a three-day prior hospitalization for Medicare coverage of a skilled nursing facility stay, are effective only for the duration of the public health emergency. The CARES Act also includes numerous income tax provisions including changes to the Net Operating Loss rules and business interest expense deduction rules.

In addition to the funds appropriated under the CARES Act, the PPPHCE Act, a stimulus package signed into law on April 24, 2020, contains additional emergency appropriations for COVID-19 response, including $75 billion to be distributed to eligible providers through the PHSSEF. This funding is also intended to reimburse providers for lost revenues and healthcare-related expenses attributable to the COVID-19 pandemic. Applicants for the funds will be required to submit a justification statement for the payments. Recipients will not be required to repay the government for funds received, provided they comply with terms and conditions, which have not yet been finalized.

Due to the recent enactment of the CARES Act and the PPPHCE Act, there is still a high degree of uncertainty surrounding their implementation, and the public health emergency continues to evolve. The federal government may consider additional stimulus and relief efforts, but we are unable to predict whether additional stimulus measures will be enacted or their impact. There can be no assurance as to the total amount of financial and other types of assistance we will receive under the CARES Act, the PPPHCE Act, or future legislation, if any, and it is difficult to predict the impact of such legislation on our operations or how it will affect operations of our competitors. Moreover, we are unable to assess the extent to which anticipated negative impacts on us arising from the COVID-19 pandemic will be covered by amounts or benefits received, and which we may in the future receive, under the CARES Act or PPPHCE Act. We continue to assess the potential impact of COVID-19 and government responses to the pandemic on our business, results of operations, financial condition and cash flows.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURE.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS

The following exhibits are filed as part of this report on Form 10-Q.




Exhibit Number			Description of Exhibits
3.1			Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement No. 33-76150 on Form S-1 filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T).

3.2			Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.5 to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2006).

3.3			Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement No. 33-76150 on Form S-1 filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T).

3.4			Bylaw Amendment adopted November 5, 2007 (incorporated by reference to Exhibit 3.4 to the Company’s annual report on Form 10-K for the year ended December 31, 2007).

3.5			Amendment to Certificate of Incorporation dated March 23, 1995 (incorporated by reference to Exhibit A of Exhibit 1 to the Company’s Form 8-A filed March 30, 1995 filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T).

3.6			Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.4 to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2001).

3.7			Certificate of Ownership and Merger of Diversicare Healthcare Services, Inc. with and into Advocat Inc. (incorporated by reference to Exhibit 3.1 to the Company's current report on Form 8-K filed March 14, 2013).

3.8			Amendment to Certificate of Incorporation dated June 9, 2016 (incorporated by reference to Exhibit 3.8 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2016).

3.9			Bylaw Second Amendment adopted April 14, 2016.

4.1			Form of Common Stock Certificate (incorporated by reference to Exhibit 4 to the Company's Registration Statement No. 33-76150 on Form S-1 filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T).

10.1			Eighth Amendment to Third Amended and Restated Revolving Loan and Security Agreement dated February 25, 2020 (incorporated by reference to Exhibit 10.36 to the Company’s annual report on Form 10-K for the year ended December 31, 2019).

10.2			Sixth Amendment to Second Amended and Restated Term Loan and Security Agreement dated February 25, 2020 (incorporated by reference to Exhibit 10.37 to the Company’s annual report Form 10-K for the year ended December 31, 2019).

10.3			First Amendment to Revolving Loan and Security Agreement dated February 25, 2020 (incorporated by reference to Exhibit 10.38 to the Company's annual report on Form 10-K for the year ended December 31, 2019).

10.4			Settlement Agreement with the U.S. Department of Justice and the State of Tennessee dated February 14, 2020 (incorporated by reference to Exhibit 10.39 to the Company’s annual report on Form 10-K for the year ended December 31, 2019).

10.5			Corporate Integrity Agreement with the Office of the Inspector General of CMS dated February 14, 2020 (incorporated by reference to Exhibit 10.40 to the Company’s annual report on Form 10-K for the year ended December 31, 2019).

10.6			Leslie Campbell Separation Agreement

10.7			Employment Agreement effective March 2, 2020, between Rebecca Bodie and Diversicare Healthcare Services, Inc.

10.8			Ninth Amendment to Third Amended and Restated Revolving Loan and Security Agreement dated April 3, 2020.

10.9			Seventh Amendment to Second Amended and Restated Term Loan and Security Agreement dated April 3, 2020.

10.10			Second Amendment to Revolving Loan and Security Agreement dated April 3, 2020.




31.1			Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).

31.2			Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).

32			Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b).

101.INS			XBRL Instance Document

101.SCH			XBRL Taxonomy Extension Schema Document

101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB			XBRL Taxonomy Extension Labels Linkbase Document

101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




	Diversicare Healthcare Services, Inc.

May 7, 2020

	By:	/s/ James R. McKnight, Jr.
		James R. McKnight, Jr.
		President and Chief Executive Officer, Principal Executive Officer and
		An Officer Duly Authorized to Sign on Behalf of the Registrant

	By:	/s/ Kerry D. Massey
		Kerry D. Massey
		Executive Vice President and Chief Financial Officer and
		An Officer Duly Authorized to Sign on Behalf of the Registrant

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