**Exhibit 99.1**

** **

**Senior Care Centers, LLC**

 

**Independent Auditor’s Report and Consolidated  Financial Statements**

 

**December 31, 2016 and 2015**

 

 

 

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**Senior Care Centers, LLC**

**December 31, 2016 and 2015**

 

**Contents**

 
| **Independent Auditor’s Report** | **1**  |
|---------------------------------------|--------|
|                                  |   |
| **Consolidated Financial Statements** |   |
|                                  |   |
| Balance   Sheets                      | 3      |
| Statements   of Operations            | 4      |
| Statements   of Members’ Equity  | 5      |
| Statements   of Cash Flows            | 6      |
| Notes   to Financial Statements       | 8      |

 

----

 

**Independent Auditor’s Report**

 

Board of Directors

Senior Care Centers, LLC

Dallas, Texas

 

We have audited the accompanying consolidated financial statements of Senior Care Centers, LLC (the “Company”), which comprise the balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of operations, members’ equity and cash flows for each of the years in the three- year period ended December 31, 2016, and the related notes to the consolidated financial statements.

 

***Management’s Responsibility for the Financial Statements***

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

***Auditor’s Responsibility***

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.  We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.  The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error.  In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.  Accordingly, we express no such opinion.  An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

----

 

***Opinion***

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Senior Care Centers, LLC (the “Company”) as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016, in accordance with accounting principles generally accepted in the United States of America.

 

/s/ BKD, LLP

Springfield, Missouri

March 15, 2017

 

2

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**Senior Care Centers, LLC**

**Consolidated Balance Sheets**

**December 31, 2016 and 2015**

 

**Assets**

 
| ** **                                                                                      | ** ** | **2016**    | ** **  | **2015**    | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
|                                                                                            |       |        |        |        |       |
| **Current   Assets**                                                                            |       |        |        |        |       |
| Cash                                                                                            |       | $           | 13,504,964  |        | $          | 9,092,366 |   |
| Restricted deposits   and funded reserves - current                                             |       | 11,943,418  |        | 19,416,270  |       |
| Patient accounts   receivable, net of allowance;    2016 - $35,300,000, 2015 - $21,900,000      |       | 144,287,533 |        | 151,713,897 |       |
| Patient accounts   receivable, ancillary, net of allowance;    2016 - $600,000, 2015 - $626,000 |       | 8,672,881   |        | 8,321,029   |       |
| Accounts   receivable, other                                                                    |       | 2,061,356   |        | 1,858,926   |       |
| Prepaid expenses   and other                                                                    |       | 7,535,439   |        | 7,170,752   |       |
|                                                                                            |       |        |        |        |       |
| Total current   assets                                                                          |       | 188,005,591 |        | 197,573,240 |       |
|                                                                                            |       |        |        |        |       |
| **Restricted   Deposits and Funded Reserves**                                                   |       | 5,575,947   |        | 1,054,500   |       |
|                                                                                            |       |        |        |        |       |
| **Investment   in Affiliates**                                                                  |       | 2,539,263   |        | 2,181,129   |       |
|                                                                                            |       |        |        |        |       |
| **Property   and Equipment, Net of Accumulated Depreciation**                                   |       | 38,478,141  |        | 27,880,149  |       |
|                                                                                            |       |        |        |        |       |
| **Other   Assets**                                                                              |       |        |        |        |       |
| Lease and other   deposits                                                                      |       | 12,688,925  |        | 13,737,714  |       |
| Other noncurrent   assets                                                                       |       | 2,141,782   |        | 1,789,662   |       |
| Goodwill                                                                                        |       | 23,871,919  |        | 23,871,919  |       |
| Favorable   leases, net                                                                         |       | 18,856,314  |        | 23,035,495  |       |
| Other   intangibles, net                                                                        |       | 489,450     |        | 640,050     |       |
| Leasehold   acquisition costs, net                                                              |       | 2,400,000   |        | 2,600,000   |       |
|                                                                                            |       |        |        |        |       |
|                                                                                            |       | 60,448,390  |        | 65,674,840  |       |
|                                                                                            |       |        |        |        |       |
| Total assets                                                                                    |       | $           | 295,047,332 |        | $          | 294,363,858 |   |

 

*See Notes to Consolidated Financial Statements*

 

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**Liabilities and Members’ Equity**

 
| ** **                                                                                                                                                      | ** ** | **2016**    | ** **  | **2015**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **Current   Liabilities**                                                                                                                                       |       |        |        |        |       |
| Current maturities of long-term debt                                                                                                                            |       | $           | 23,687,504  |        | $          | 13,040,923 |   |
| Accounts payable                                                                                                                                                |       | 59,227,885  |        | 46,749,978  |       |
| Accrued salaries                                                                                                                                                |       | 14,369,463  |        | 14,661,455  |       |
| Payroll taxes   and compensated absences                                                                                                                        |       | 8,887,243   |        | 5,994,761   |       |
| Self-insurance   reserves, current portion                                                                                                                      |       | 11,303,675  |        | 15,292,593  |       |
| Estimated   amounts due to third-party payers                                                                                                                   |       | 14,135,146  |        | 8,648,460   |       |
| Other accrued   expenses                                                                                                                                        |       | 7,408,704   |        | 16,249,004  |       |
| Tenant deposits                                                                                                                                                 |       | 397,394     |        | 461,273     |       |
|                                                                                                                                                            |       |        |        |        |       |
| Total current   liabilities                                                                                                                                     |       | 139,417,014 |        | 121,098,447 |       |
|                                                                                                                                                            |       |        |        |        |       |
| **Long-Term   Debt**                                                                                                                                            |       | 89,596,445  |        | 117,711,427 |       |
|                                                                                                                                                            |       |        |        |        |       |
| **Self-Insurance   Reserves, Noncurrent Portion**                                                                                                               |       | 8,087,417   |        | 5,019,173   |       |
|                                                                                                                                                            |       |        |        |        |       |
| **Unfavorable   Leases, Net**                                                                                                                                   |       | 4,601,431   |        | 9,007,750   |       |
|                                                                                                                                                            |       |        |        |        |       |
| **Related   Party Accrued Facility Rent**                                                                                                                       |       | 3,474,745   |        | 8,527,336   |       |
|                                                                                                                                                            |       |        |        |        |       |
| **Accrued   Facility Rent**                                                                                                                                     |       | 29,169,488  |        | 14,809,212  |       |
|                                                                                                                                                            |       |        |        |        |       |
| Total   liabilities                                                                                                                                             |       | 274,346,540 |        | 276,173,345 |       |
|                                                                                                                                                            |       |        |        |        |       |
| **14%   Redeemable Class A Membership Units, $4 Per Unit;    5,000,000 Units Authorized, 3,387,500 Units Issued and Outstanding, Net of   Issuance Costs** |       | 12,533,823  |        | —      |       |
|                                                                                                                                                            |       |        |        |        |       |
| **Members’   Equity**                                                                                                                                      |       | 8,166,969   |        | 18,190,513  |       |
|                                                                                                                                                            |       |        |        |        |       |
| Total   liabilities and members’ equity                                                                                                                    |       | $           | 295,047,332 |        | $          | 294,363,858 |   |

 

3

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**Senior Care Centers, LLC**

**Consolidated Statements of Operations**

**Years Ended December 31, 2016, 2015 and 2014**

 
| ** **                                                           | ** ** | **2016**    | ** **  | **2015**    | ** ** | **2014**    | ** ** |
|----------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
|                                                                 |       |        |        |        |       |        |       |
| **Net   Patient Service Revenue**                                    |       | $           | 925,054,555 |        | $          | 760,057,383 |       | $ | 383,778,776 |   |
|                                                                 |       |        |        |        |       |        |       |
| **Management   Fees**                                                |       | —      |        | 2,840,406   |       | 11,124,625  |       |
|                                                                 |       |        |        |        |       |        |       |
| **Other   Revenue**                                                  |       | 5,438,119   |        | 3,274,286   |       | 1,584,237   |       |
|                                                                 |       |        |        |        |       |        |       |
| Total revenue                                                        |       | 930,492,674 |        | 766,172,075 |       | 396,487,638 |       |
|                                                                 |       |        |        |        |       |        |       |
| **Expenses**                                                         |       |        |        |        |       |        |       |
| Salaries, wages   and benefits                                       |       | 453,041,346 |        | 368,707,029 |       | 189,121,961 |       |
| Other operating                                                      |       | 290,473,064 |        | 232,130,987 |       | 122,451,621 |       |
| Provision for   uncollectible accounts                               |       | 27,656,916  |        | 12,607,833  |       | 9,323,399   |       |
| Related party   facility rent                                        |       | 47,331,496  |        | 47,503,906  |       | 44,554,911  |       |
| Facility rent                                                        |       | 94,299,796  |        | 67,012,032  |       | 14,325,102  |       |
| Interest                                                             |       | 9,162,551   |        | 5,295,188   |       | 1,948,362   |       |
| Depreciation and   amortization                                      |       | 8,357,050   |        | 5,858,495   |       | 2,325,437   |       |
| Start-up costs                                                       |       | 332,896     |        | 3,281,738   |       | 2,561,648   |       |
| Related party   accrued facility rent                                |       | (2,005,882  | )           | (2,159,808  | )          | 1,330,133   |       |
| Accrued facility   rent                                              |       | 11,036,430  |        | 7,725,041   |       | 1,755,303   |       |
|                                                                 |       |        |        |        |       |        |       |
| Total expenses                                                       |       | 939,685,663 |        | 747,962,441 |       | 389,697,877 |       |
|                                                                 |       |        |        |        |       |        |       |
| **Income   (Loss) Before Equity in Net Income (Loss) of Affiliates** |       | (9,192,989  | )           | 18,209,634  |       | 6,789,761   |       |
|                                                                 |       |        |        |        |       |        |       |
| **Equity   in Net Income (Loss) of Affiliates**                      |       | 422,870     |        | 116,448     |       | (531,046    | )          |
|                                                                 |       |        |        |        |       |        |       |
| **Net   Income (Loss)**                                              |       | $           | (8,770,119  | )           | $          | 18,326,082  |       | $ | 6,258,715 |   |
|                                                                 |       |        |        |        |       |        |       |
| **Amounts   Attributable to Noncontrolling Interest**                |       |        |        |        |       |        |       |
| Net income   (loss)                                                  |       | $           | (8,770,119  | )           | $          | 18,326,082  |       | $ | 6,258,715 |   |
| Less: net income   attributable to the noncontrolling interest       |       | —      |        | (409,503    | )          | (1,321,180  | )          |
|                                                                 |       |        |        |        |       |        |       |
| Net income   (loss) attributable to Senior Care Centers, LLC         |       | $           | (8,770,119  | )           | $          | 17,916,579  |       | $ | 4,937,535 |   |

 

*See Notes to Consolidated Financial Statements*

 

4

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**Senior Care Centers, LLC**

**Consolidated Statements of Members’ Equity**

**Years Ended December 31, 2016, 2015 and 2014**

 
| ** **                                                             | ** ** | **Senior Care   Centers, LLC   Members’   Equity** | ** ** | **Noncontrolling   Interest** | ** ** | **Total**  | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------|------------|------------|------------|
|                                                                   |       |                                                              |       |                          |       |       |       |
| **Members’   Equity, January 1, 2014**                       |       | $                                                                 | 3,250,068  |                          | $          | —     |       | $ | 3,250,068 |   |
|                                                                   |       |                                                              |       |                          |       |       |       |
| Contributions                                                          |       | —                                                            |       | 4,248,767                     |       | 4,248,767  |       |
|                                                                   |       |                                                              |       |                          |       |       |       |
| Distributions                                                          |       | (3,067,342                                                        | )          | —                        |       | (3,067,342 | )          |
|                                                                   |       |                                                              |       |                          |       |       |       |
| Net income                                                             |       | 4,937,535                                                         |       | 1,321,180                     |       | 6,258,715  |       |
|                                                                   |       |                                                              |       |                          |       |       |       |
| **Members’   Equity, December 31, 2014**                     |       | 5,120,261                                                         |       | 5,569,947                     |       | 10,690,208 |       |
|                                                                   |       |                                                              |       |                          |       |       |       |
| Purchase of   subsidiary membership units from noncontrolling interest |       | —                                                            |       | (5,979,450                    | )          | (5,979,450 | )          |
|                                                                   |       |                                                              |       |                          |       |       |       |
| Distributions                                                          |       | (4,846,327                                                        | )          | —                        |       | (4,846,327 | )          |
|                                                                   |       |                                                              |       |                          |       |       |       |
| Net income                                                             |       | 17,916,579                                                        |       | 409,503                       |       | 18,326,082 |       |
|                                                                   |       |                                                              |       |                          |       |       |       |
| **Members’   Equity, December 31, 2015**                     |       | 18,190,513                                                        |       | —                        |       | 18,190,513 |       |
|                                                                   |       |                                                              |       |                          |       |       |       |
| Distributions                                                          |       | (1,253,425                                                        | )          | —                        |       | (1,253,425 | )          |
|                                                                   |       |                                                              |       |                          |       |       |       |
| Net loss                                                               |       | (8,770,119                                                        | )          | —                        |       | (8,770,119 | )          |
|                                                                   |       |                                                              |       |                          |       |       |       |
| **Members’   Equity, December 31, 2016**                     |       | $                                                                 | 8,166,969  |                          | $          | —     |       | $ | 8,166,969 |   |

 

*See Notes to Consolidated Financial Statements*

 

5

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**Senior Care Centers, LLC**

**Consolidated Statements of Cash Flows**

**Years Ended December 31, 2016, 2015 and 2014**

 
| ** **                                                                | ** ** | **2016**   | ** ** | **2015**    | ** ** | **2014**    | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|
|                                                                      |       |       |       |        |       |        |       |
| **Operating   Activities**                                                |       |       |       |        |       |        |       |
| Net income (loss)   before attribution of noncontrolling interest         |       | $          | (8,770,119 | )           | $          | 18,326,082  |       | $ | 6,258,715 |   |
| Net income   attributable to noncontrolling interest                      |       | —     |       | (409,503    | )          | (1,321,180  | )          |
| Net income   (loss) attributable to Senior Care Centers, LLC              |       | (8,770,119 | )          | 17,916,579  |       | 4,937,535   |       |
| Reconciling   adjustments                                                 |       |       |       |        |       |        |       |
| Depreciation and   amortization                                           |       | 8,357,050  |       | 5,858,495   |       | 2,325,437   |       |
| Amortization of   deferred financing costs                                |       | 1,192,518  |       | 329,448     |       | 221,574     |       |
| Related party   accrued facility rent                                     |       | (5,052,591 | )          | (1,986,727  | )          | 1,494,906   |       |
| Accrued facility   rent                                                   |       | 14,083,139 |       | 7,551,960   |       | 1,590,530   |       |
| Gain on sale of   affiliate                                               |       | —     |       | (736,011    | )          | —      |       |
| Losses (gains)   of affiliates                                            |       | (418,352   | )          | (116,448    | )          | 531,046     |       |
| Unrealized   intercompany losses (gains) of affiliates                    |       | (232,374   | )          | (64,682     | )          | —      |       |
| Distributions   received from affiliates                                  |       | 292,592    |       | 229,866     |       | 300,070     |       |
| Changes in                                                                |       |       |       |        |       |        |       |
| Accounts   receivable (patient, ancillary and other)                      |       | 6,872,082  |       | (82,431,125 | )          | (20,235,693 | )          |
| Management fees   receivable                                              |       | —     |       | 93,619      |       | (6,288,595  | )          |
| Prepaid expenses   and other noncurrent assets                            |       | (716,807   | )          | (1,198,714  | )          | (1,298,690  | )          |
| Accounts payable   and accrued expenses                                   |       | 8,077,143  |       | 43,020,450  |       | 25,600,498  |       |
| Tenant deposits                                                           |       | (63,879    | )          | 445,997     |       | (2,909      | )          |
| Noncontrolling   interest                                                 |       | —     |       | 409,503     |       | 1,321,180   |       |
|                                                                      |       |       |       |        |       |        |       |
| Net cash provided   by (used in) operating activities                     |       | 23,620,402 |       | (10,677,790 | )          | 10,496,889  |       |
|                                                                      |       |       |       |        |       |        |       |
| **Investing   Activities**                                                |       |       |       |        |       |        |       |
| Net proceeds   from (payments to) restricted deposits and funded reserves |       | 2,951,405  |       | (7,123,614  | )          | (2,337,285  | )          |
| Purchase of   property and equipment                                      |       | (5,930,268 | )          | (10,044,620 | )          | (3,467,353  | )          |
| Investment in   affiliate                                                 |       | —     |       | (2,000,000  | )          | —      |       |
| Payment of   leasehold acquisition costs                                  |       | —     |       | —      |       | (3,000,000  | )          |
| Proceeds from   (payment of) lease and other deposits                     |       | 1,048,789  |       | (4,436,536  | )          | (153,446    | )          |
| Payments for   business acquisitions                                      |       | —     |       | (60,077,971 | )          | —      |       |
| Cash acquired in   business acquisition                                   |       | —     |       | 1,488,765   |       | —      |       |
| Proceeds from   sale of equity investments                                |       | —     |       | 3,100,000   |       | —      |       |
|                                                                      |       |       |       |        |       |        |       |
| Net cash used in   investing activities                                   |       | (1,930,074 | )          | (79,093,976 | )          | (8,958,084  | )          |
|                                                                           |            |            |            |             |            |             |            |  |  |  |

 

*See Notes to Consolidated Financial Statements*

 

6

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**Senior Care Centers, LLC**

**Consolidated Statements of Cash Flows**

**Years Ended December 31, 2016, 2015 and 2014**

 
| ** **                                                      | ** ** | **2016**    | ** ** | **2015**    | ** ** | **2014**    | ** ** |
|-----------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                            |       |        |       |        |       |        |       |
| **Financing   Activities**                                      |       |        |       |        |       |        |       |
| Proceeds from   issuance of long-term debt                      |       | $           | 11,500,000 |        | $          | 132,857,337 |       | $ | 14,045,000 |   |
| Principal   payments on long-term debt                          |       | (38,811,367 | )          | (34,385,876 | )          | (8,244,717  | )          |
| Principal   payments on capital lease obligations               |       | (1,262,204  | )          | (744,216    | )          | (231,335    | )          |
| Proceeds from   redeemable Class A membership units        |       | 13,550,079  |       | —      |       | —      |       |
| Payments of   equity issuance costs                             |       | (100,150    | )          | —      |       | —      |       |
| Payment of   financing costs                                    |       | (900,663    | )          | (1,919,921  | )          | (123,705    | )          |
| Distributions   paid to members                                 |       | (1,253,425  | )          | (4,846,327  | )          | (3,067,342  | )          |
|                                                            |       |        |       |        |       |        |       |
| Net cash   provided by (used in) financing activities           |       | (17,277,730 | )          | 90,960,997  |       | 2,377,901   |       |
|                                                            |       |        |       |        |       |        |       |
| **Increase   in Cash**                                          |       | 4,412,598   |       | 1,189,231   |       | 3,916,706   |       |
|                                                            |       |        |       |        |       |        |       |
| **Cash,   Beginning of Year**                                   |       | 9,092,366   |       | 7,903,135   |       | 3,986,429   |       |
|                                                            |       |        |       |        |       |        |       |
| **Cash,   End of Year**                                         |       | $           | 13,504,964 |        | $          | 9,092,366   |       | $ | 7,903,135 |   |
|                                                            |       |        |       |        |       |        |       |
| **Supplemental   Cash Flows Information**                       |       |        |       |        |       |        |       |
| Accounts payable   incurred for property and equipment          |       | $           | 2,209,199  |        | $          | 398,339     |       | $ | 145,169 |   |
| Interest paid                                                   |       | $           | 7,923,823  |        | $          | 4,496,857   |       | $ | 1,743,695 |   |
| Capital lease   obligations incurred for property and equipment |       | $           | 10,813,315 |        | $          | 75,349      |       | $ | 218,528 |   |
| Accrued expenses   incurred for equity issuance costs           |       | $           | 916,106    |        | $          | —      |       | $ | — |   |
| Noncontrolling   interest granted in business combination       |       | $           | —     |        | $          | —      |       | $ | 4,248,767 |   |

 

On April 1, 2015, the Company purchased all of the membership units of CTLTC Real Estate, LLC and paid cash of $41,520,015.  At March 31, 2015, CTLTC Real Estate, LLC owed the Company for management fees, payroll costs and rehabilitation therapy services of $11,461,432 which was settled as part of the business combination.  In conjunction with the acquisition, liabilities were assumed as follows:

 
| Fair value of   assets acquired                  |   | $           | 81,088,853 |   |
|--------------------------------------------------|--------|-------------|------------|--------|
| Fair value of   noncontrolling interest acquired |   | 5,979,450   |       |
| Amount paid for   the membership units           |   | (52,981,447 | )          |
|                                             |   |        |       |
| Liabilities   assumed                            |   | $           | 34,086,856 |   |

 

On September 1, 2015, the Company purchased all of the membership units of a hospice company and a rehabilitation therapy company in Louisiana for $18,557,956.  In conjunction with the acquisition, liabilities were assumed as follows:

 
| Fair value of assets acquired        |   | $           | 19,133,257 |   |
|--------------------------------------|--------|-------------|------------|--------|
| Cash paid for   the membership units |   | (18,557,956 | )          |
|                                 |   |        |       |
| Liabilities   assumed                |   | $           | 575,301    |   |

 

*See Notes to Consolidated Financial Statements*

 

7

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

** **

**Note 1:**                                     **Nature of Operations and Summary of Significant Accounting Policies**

 

***Nature of Operations***

 

Senior Care Centers, LLC (the “Company”) started operations in 2009.  At December 31, 2016, the Company operated ninety-seven skilled nursing facilities, ten assisted living facilities, three rehabilitation therapy companies, one investment company, six hospice facilities, two pharmacy companies, a wellness company, a contract medical staff company and one parent company, which are all located in Texas and Louisiana.  The skilled nursing facilities have a total of approximately 12,410 beds and the assisted living facilities have 720 beds.  All of the skilled nursing facilities are Medicaid and Medicare certified.

 

Senior Care Center Management, LLC is the management company for all of the operations of the companies included in the consolidated financial statements.  Senior Care Center Management, LLC also managed the external operations of 28 skilled nursing facilities and eight assisted living facilities during 2014.  After the Company executed a transaction effective April 1, 2015, the Company no longer managed operations for any external parties.

 

The Company executed a transaction effective January 1, 2014, that significantly impacted the operating structure of the Company.  The Company entered into lease agreements to operate ten additional skilled nursing facilities and one assisted living facility.  The Company established new legal entities included in SCC Granite Trisun Portfolios #1, #2 and #4 which are wholly owned subsidiaries of the Company and are managed by Senior Care Center Management, LLC.  The Company paid $3,000,000 to the previous lessors of the SCC Granite Trisun Portfolios as consideration for terminating the previous leases on the properties.  See further discussion of leasehold acquisition costs in*Note 1*.  The Company entered into an agreement to combine the operations of Senior Rehab Solutions, LLC with another therapy provider.  After the transaction, the Company retained an 85% ownership interest in the surviving company and the other for-profit provider retained a 15% minority ownership through April 1, 2015.  This business combination is further described in *Note 14*.  Senior Care Center Management, LLC entered into a master management agreement to manage an additional 31 skilled nursing facilities and eight assisted living facilities.  Three skilled nursing facilities were subsequently divested during 2014.  See further discussion of management fees included in*Note 1*.

 

The Company executed multiple transactions throughout 2015 that significantly expanded the operations of the Company.  The Company established several new legal entities which are wholly owned subsidiaries of the Company, and all of the new operating portfolios are managed by Senior Care Center Management, LLC.  See further discussion of the additional leasing arrangements entered into for the various portfolios described below in*Note 11*, and additional debt obtained in *Note 10*.

 

·                                Paramount Portfolio - On February 1, 2015, the Company entered into lease agreements to operate 14 skilled nursing facilities.

 

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

·                                CTLTC Portfolio - On April 1, 2015, the Company entered into a membership interest purchase agreement, executing its purchase option to acquire all of the outstanding membership units of CTLTC Real Estate, LLC which operated 28 skilled nursing facilities and eight assisted living facilities previously managed by Senior Care Center Management, LLC a pharmacy company and the remaining 15% noncontrolling interest of Senior Rehab Solutions, LLC as described above.  This business combination is further described in *Note 14.*  During 2015, two of the skilled nursing facilities and one assisted living facility were divested after the transaction.

 

·                                Momentum and Rio Grande Portfolios - On June 30, 2015, the Company entered into lease agreements to operate five skilled nursing facilities in total.

 

·                                Vegas Portfolio - On September 1, 2015, the Company entered into a master purchase agreement to acquire all of the membership units of four hospice facilities, the assets of a rehabilitation therapy company and a minority interest in a pharmacy company.  This business combination is further described in *Note 14.*  The Company also entered into lease agreements to operate eight skilled nursing facilities and one assisted living facility.

 

·                                SCC LTC Portfolio #1 - On November 1, 2015, the Company entered into a lease agreement to operate two skilled nursing facilities that were added to an existing portfolio.

 

·                                Socorro Portfolio #1 - On December 1, 2015, the Company entered into a lease agreement to operate a new skilled nursing facility.

 

***Principles of Consolidation***

 

The consolidated financial statements include the accounts of the parent company and its wholly owned subsidiaries, as follows:

 

Senior Care Centers, LLC (parent company)

SCC Senior Care Investments, LLC

Senior Care Centers Home Health, LLC

Senior Care Center Management, LLC

CTLTC Real Estate, LLC

Trisun Healthcare, LLC

SCC Hospice Holdco, LLC

Senior Care Center Management II, LLC

Rehab Services PT OT SLP, LLC

MBS Pharmacy — Ft. Worth

Senior Rehab Solutions North Louisiana, LLC

Nicoya Health and Lifestyle Management, LLC

Canopy Medical Staffing, LLC

Harden Pharmacy, LLC

Senior Rehab Solutions, LLC

 

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

The following table describes the various operating portfolios of the Company.

 

| **Portfolio Name**         | ** ** | **Type of Operations**            | ** ** | **Effective Date**                      |
|---------------------------------|------------|---------------------------------------------|------------|----------------------------------------------|
|                            |       |                                        |       |                                         |
| SCC Granite Portfolio #1        |       | skilled nursing and assisted living         |       | May 1, 2009                             |
| SCC Granite Portfolio #2        |       | skilled nursing                             |       | December 1, 2009                        |
| SCC NHP Portfolio #1            |       | skilled nursing                             |       | July 1, 2010                            |
| SCC LTC Portfolio #1            |       | skilled nursing                             |       | December 1, 2010, November 1, 2015 |
| SCC Sabra Portfolio #1          |       | skilled nursing                             |       | January 1, 2011                         |
| SCC Hidalgo Portfolio #1        |       | skilled nursing                             |       | July 22, 2013                           |
| SCC Granite Trisun Portfolio #1 |       | skilled nursing and assisted living         |       | January 1, 2014                         |
| SCC Granite Trisun Portfolio #2 |       | skilled nursing                             |       | January 1, 2014                         |
| SCC Granite Trisun Portfolio #4 |       | skilled nursing                             |       | January 1, 2014                         |
| Paramount Portfolio             |       | skilled nursing                             |       | February 1, 2015                        |
| CTLTC Portfolio                 |       | skilled nursing and assisted living         |       | April 1, 2015                           |
| Momentum Portfolio              |       | skilled nursing                             |       | June 30, 2015                           |
| Rio Grande Portfolio            |       | skilled nursing                             |       | June 30, 2015                           |
| Vegas Portfolio                 |       | skilled nursing assisted living and hospice |       | September 1, 2015                       |
| Socorro Portfolio               |       | skilled nursing                             |       | December 1, 2015                        |

 

All significant intercompany accounts and transactions have been eliminated in consolidation.

 

***Limited Liability Company***

 

The Company operates as a limited liability company.  Generally, the liability of the members is limited to their member contributions, with certain exceptions and limitations for some unit holder classes.  The rights, preferences and privileges of members vary by type of unit class.  Upon the occurrence of a liquidating event, the proceeds will be distributed to members who are creditors in accordance with their legal priority, then pro rata in accordance with amounts owned and finally to members in accordance with their capital accounts.

 

***Restricted Deposits and Funded Reserves***

 

The Company is required by its operating lease agreements to deposit funds into capital expenditures reserve accounts monthly.  The Company can request reimbursement from the lessors from these accounts for capital expenditures made to maintain the leased premises.

 

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

The following table summarizes each of the Company’s required monthly deposits per the Company’s respective lease agreements:

 
| **Portfolio**                   | ** ** | **Capital Reserve Requirements**  |
|---------------------------------|------------|---------------------------------------------|
|                            |       |                                        |
| SCC Granite Portfolio #1        |       | $550 per bed (potentially $600 in 6th year) |
| SCC Granite Portfolio #2        |       | $42,000 per facility                        |
| SCC NHP Portfolio #1            |       | $285-965 (1)                                |
| SCC LTC Portfolio #1            |       | $400 per bed (3)                            |
| SCC Sabra Portfolio #1          |       | $350 per bed                                |
| SCC Hidalgo Portfolio #1        |       | $350 per bed                                |
| SCC Granite Trisun Portfolio #1 |       | $550 per bed                                |
| SCC Granite Trisun Portfolio #2 |       | $550 per bed                                |
| SCC Granite Trisun Portfolio #4 |       | $550 per bed                                |
| Paramount Portfolio             |       | $205-$875 per bed (1)                       |
| CTLTC Portfolio                 |       | $205-$875 per bed (1)(2)                    |
| Momentum Portfolio              |       | $450 per bed                                |
| Rio Grande Portfolio            |       | $450 per bed                                |
| Vegas Portfolio                 |       | $205-$875 per bed (1)                       |
| Socorro Portfolio               |       | $350 per bed                                |

 

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(1)  Graduated rate based on facility age as well as number of beds

(2)  Some operating entities do not have a capital expenditure reserve requirement

(3)  The lease agreement states a minimum balance of capital expenditure funds that have to be maintained with the lessor for the remaining lease term of $476,000 by August 1, 2015, and $577,600 by August 1, 2017.

 

The Company also deposits funds for property taxes and property insurance.  The Company requests reimbursement upon the payment of insurance premiums.  Restricted deposits and funded reserves expected to be used within the next year have been included with current assets on the consolidated balance sheets.  All deposits and reserves are held by the lessors.

 

***Property Taxes***

 

The Company deposits funds with the lessors monthly for property taxes.  The Company recorded property tax expense of approximately $11,657,000, $8,198,000 and $3,850,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

 

***Cash***

 

The Company’s cash accounts include zero balance accounts for each entity that sweep into a master account each day.  At December 31, 2016, the Company’s cash accounts exceeded federally insured limits by approximately $22,124,000 due to the concentration of funds in the master account.

 

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

***Patient Accounts Receivable***

 

The Company reports patient accounts receivable for services rendered at net realizable amounts from third-party payers, residents and others.  The Company provides an allowance for uncollectible accounts based upon a review of outstanding receivables, historical collection information and existing economic conditions.  As a service to the residents, the Company bills third-party payers directly and bills the resident when the resident’s liability is determined.  Patient accounts receivable are due in full when billed.  Accounts are considered delinquent and subsequently written off as bad debts based on individual credit evaluation and specific circumstances of the account.

 

***Investment in Affiliates***

 

SCC Senior Care Investments, LLC had a 6.82% ownership in NHP SCC LLC, which it sold effective December 31, 2015.  Senior Care Centers Home Health, LLC had a 50% ownership interest in Senior Care Consultants at Home, Ltd.  As of December 31, 2014, the Company wrote off this investment due to declining operations.  On September 1, 2015, the Company purchased a 37.037% ownership interest in Partners Pharmacy, LLC.

 

All of the investments in affiliates are reported on the equity method of accounting.

 

***Property and Equipment***

 

Property and equipment acquisitions are stated at cost or at the fair value determined on the respective dates of acquisition for assets obtained in a business combination, less accumulated depreciation.  Depreciation is charged to expense on the straight-line method over the estimated useful life of each asset.  Leasehold improvements are amortized over the shorter of the lease term or their respective estimated useful lives.

 

The estimated useful lives for each major depreciable classification of property and equipment are as follows:

 
| Buildings              |   | 15 - 39 years |
|------------------------|--------|---------------|
| Leasehold improvements |   | 5 - 15 years  |
| Equipment              |   | 3 - 10 years  |
| Furniture and fixtures |   | 3 - 10 years  |

 

***Long-Lived Asset Impairment***

 

The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable.  If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.

 

No asset impairment was recognized during the years ended December 31, 2016, 2015 and 2014.

 

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

***Goodwill***

 

Goodwill is evaluated annually for impairment or more frequently if impairment indicators are present.  A qualitative assessment is performed to determine whether the existence of events or circumstances leads to a determination that it is more likely than not the fair value is less than the carrying amount, including goodwill.  If, based on the evaluation, it is determined to be more likely than not that the fair value is less than the carrying value, then goodwill is tested further for impairment.  During 2016, the Company elected to bypass the qualitative analysis and proceed directly to the Step 1 quantitative analysis.  If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value.  Subsequent increases in goodwill value are not recognized in the consolidated financial statements.

 

***Use of Estimates***

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

***Favorable and Unfavorable Leases***

 

The Company performed an assessment of the operating lease commitments assumed from CTLTC Real Estate, LLC as part of the Project Ranger II business combination, more fully described in *Note 14*.  The assessment measured each of the operating leases separately to determine if they were favorable or unfavorable based on the given market conditions at the acquisition date.  Based on the results of the assessment, leasing arrangements are recognized as either an asset or liability on the consolidated balance sheets, and are being amortized to rental expense over the respective terms of the leases.

 

***Other Intangibles***

 

The Company entered into five-year noncompete agreements with the majority of the sellers of CTLTC Real Estate, LLC, commencing on April 1, 2015, as part of the Project Ranger II business combination.  See further discussion in *Note 14*.  The Company performed an assessment to determine the fair value of these agreements at the acquisition date.  The recognized asset is being amortized over five years, which is the duration that the sellers are constrained by the covenants.

 

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

***Leasehold Acquisition Costs***

 

In January 2014, the Company paid $3,000,000 to the previous lessors of the SCC Granite Trisun Portfolios as consideration for terminating the previous leases on the properties.  The Company paid the stated amount with a combination of a cash payment, a short-term promissory note and a management fee credit.  Leasehold acquisition costs are being amortized on the straight-line basis over the lease term of 15 years.

 

***Net Patient Service Revenue***

 

The Company has agreements with third-party payers that provide for payments to the Company at amounts different from their established rates.  Net patient service revenue is reported at the estimated net realizable amounts from residents, third-party payers and others for services rendered and includes estimated retroactive revenue adjustments.  Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered and such estimated amounts are revised in future periods as adjustments become known.

 

***Management Fees***

 

Senior Care Center Management, LLC is the management company for all of the entities included in the consolidated financial statements and has also been the management company for unrelated entities not included in the consolidated financial statements.

 

Senior Care Center Management, LLC entered into a master management agreement to manage 31 skilled nursing facilities and eight assisted living facilities, effective January 1, 2014.  Three skilled nursing facilities were subsequently divested during 2014.  Senior Care Center Management, LLC received management fees based on a percentage of gross revenues, and had the potential to receive additional management fees based on the financial performance of the managed facilities.  The Company exercised its purchase option and acquired all of the membership interests in the managed facilities on April 1, 2015.  See further discussion of this transaction in *Note 14.*

 

Senior Care Center Management, LLC recognizes management fee revenue in accordance with its management agreements as services are rendered.  Intercompany management fees have been eliminated in consolidation.  Management fees receivable includes amounts due for management fees and for expenses to be reimbursed.  The Company provides an allowance for uncollectible management fees based upon a review of outstanding receivables.

 

The Company was also responsible for all employee obligations of the managed facilities. The employee salary and benefit expenses are paid directly through a separate wholly owned subsidiary, Senior Care Center Management II, LLC, which is included in the consolidated financial statements.  The Company receives reimbursement for all the managed facilities’ salaries and benefits paid from the unrelated entities which are not included in the consolidated financial statements.  Management fee revenues are net of direct pass-through costs, primarily consisting of payroll wages, taxes and related benefits of $0, $22,809,729 and $93,701,943 for the years ended December 31, 2016, 2015 and 2014, respectively.

 

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

***Rehabilitation Therapy Services***

 

Senior Rehab Solutions, LLC provides contract rehabilitation therapy services to related skilled nursing facilities included in the consolidated financial statements and to unrelated skilled nursing facilities not included in the consolidated financial statements.  Intercompany therapy services have been eliminated in consolidation.  The Company provides an allowance for uncollectible accounts based upon a review of outstanding receivables.

 

Effective January 1, 2014, the Company entered into an agreement to combine the operations of Senior Rehab Solutions, LLC with another therapy provider.  Additionally, the Company acquired another therapy provider on September 1, 2015.  These transactions are more fully described in *Note 14*.

 

Effective December 1, 2016, the Company created a new wholly owned subsidiary, Rehab Services PT OT SLP LLC, to provide therapy services to unrelated providers in New York.

 

***Pharmacy Services***

 

The Company acquired the equity of CTLTC Real Estate on April 1, 2015, which owned and operated a pharmacy company that provided services to enhance the clinical outcomes of its patients in the facilities it operated.  See further discussion of this transaction in *Note 14.*  After the acquisition date, pharmaceutical services were provided to related skilled nursing facilities included in the consolidated financial statements and to unrelated skilled nursing facilities not included in the consolidated financial statements.  Intercompany pharmacy services have been eliminated in consolidation.  The Company provides an allowance for uncollectible accounts based upon a review of outstanding receivables.

 

***Income Taxes***

 

The Company is a limited liability company, which is a disregarded entity for income tax purposes.  Therefore, taxable income or loss is reported to the members for inclusion in their tax returns and transactions between the Company and its members are disregarded for tax purposes.  No provision for federal income taxes is included in these statements.  Senior Care Centers, LLC (parent company) is a single member of each of the LLC entities included in the consolidated financial statements.  Senior Care Centers, LLC is a single member of Senior Rehab Solutions, LLC effective April 1, 2015, when the Company acquired the 15% minority interest back as part of the business combination more fully described in *Note 14*.

 

***Professional Liability Claims***

 

The Company recognizes an accrual for claim liabilities based on estimated ultimate losses and costs associated with settling claims and a receivable to reflect the estimated insurance recoveries, if any.  Legal fees related to these losses are included in the accrual.  Professional liability claims are described more fully in *Note 7*.

 

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

***Estimated Amounts Due to Third Party Payers***

 

The Texas Medicaid system has a staffing enhancement program that provides incentives to skilled nursing facilities to increase direct care staff and compensation to improve the quality of care to residents. The program can result in increased payments above base rates to participating facilities. However, if facilities fall below minimum staffing and spending requirements, recoupments of reimbursement can result.  The staffing enhancement settlement is computed on the year-end cost report.  The Company has contracted with an independent third party to calculate the staffing enhancement settlements monthly and records an accrual for these estimates.

 

The State of Louisiana’s reimbursement program uses the Medicare Minimum Data Set to determine the level of needs of Medicaid recipients in nursing facilities to ensure that nursing facilities receive a level of reimbursement commensurate with the level of services provided.  The program requires that nursing facilities expend a set amount of funding received for the provision of direct care services.  If expenditures for direct care are not at an acceptable level, the nursing facility must reimburse the state for a portion of the funding received.  The settlement for this program is computed on the year-end cost report.  The Company utilizes a template to estimate potential recoupments and records an accrual for these estimates.

 

***Members’ Equity***

 

The operating agreement of the Company authorizes the issuance of up to one hundred million Class A units at $1 per share.  In 2009, the Company issued 12.5 million Class A units and 37.5 million Class B units.  Class A unit holders will receive a return of 10% of their initial capital contributions.  Upon dissolution, the Company’s remaining assets would be applied first to all debts and liabilities to creditors other than unit holders, second to debts and liabilities to unit holders in accordance with legal priority, and the balance would be distributed to unit holders in accordance with their capital accounts after all mandatory distributions were made.

 

In addition, the Company is authorized to issue options, designated as Class C Units, for up to 7.5% of the issued membership units, pursuant to the 2009 Option Plan Agreement.  The Company granted nonqualified options to purchase up to two million membership units of the Company to members of the Board of Directors.  The options vest over a four-year period and expire at the earlier of the termination of the services of the option holder or the 10th anniversary of the grant date.  The total compensation expense related to these options to be recognized over the four-year vesting period was approximately $220,000 determined using the Black-Scholes model.  During 2014, two members of the Board of Directors that were granted options to purchase up to 1.5 million membership units terminated their services, so these options were forfeited.

 

The Company is authorized to issue warrants for up to 1,250,000 membership units, designated as Class C Units, pursuant to the operating agreement.  The Company granted warrants for 1,200,000 Class C units to initial debt holders, who have been paid in full.  The warrants may be exercised for a conversion rate of $1, subject to adjustments, and expire on various dates ranging from 2018 to 2020.

 

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

As of December 31, 2016, there are no Class C Units issued and outstanding, as no options or warrants have been exercised.

 

During 2016, the Company solicited additional equity capital through the issuance of up to five million Class A membership units for an amount of $4 per unit for a total of $20 million to provide additional working capital and to retire short-term debt.  Fees will be assessed at closing that will reduce the available capital contributions to the Company.  As of December 31, 2016, the Company raised $12.5 million, net of fees of 7.5%, through the issuance of 3,387,500 membership units.  Each new subscriber will receive an option to put its units back to the Company, exercisable beginning January 1, 2019, through June 30, 2019, for a return equal to 10% of their initial capital contribution, plus a premium of 4% per annum.  Class A unit holders will receive a return equal to 10% of their initial capital contribution, plus a premium of 4% per annum.  Additional units will be issued to fully fund the $20 million solicitation after year end and is described more fully in *Note 18*.

 

The Company accounts for its 14% redeemable Class A units in accordance with the Codification Topic, Distinguishing Liabilities from Equity (ASC 480-10-S99).  Based on the Company’s analysis, the redeemable units have been classified as redeemable interests outside of permanent equity in the mezzanine section of the Company’s consolidated balance sheets as a result of the put option described above.

 

***Reclassifications***

 

Certain reclassifications have been made to the 2015 and 2014 consolidated financial statements to conform to the 2016 consolidated financial statement presentation.  These reclassifications had no effect on net income.

 

Certain reclassifications have been made to the 2015 and 2014 financial statements for the adoption of ASU 2015-03, *Interest — Imputation of Interest (Subtopic 835-30):** Simplifying the Presentation of Debt Issuance Costs*, that were deemed to be immaterial.  These reclassifications had no effect on earnings.

 

***Impact of Recent Authoritative Accounting Guidance***

 

The Accounting Standards Codification TM (ASC) is the Financial Accounting Standards Board’s (FASB) officially recognized source of authoritative GAAP applicable to all public and nonpublic nongovernmental entities.  All other accounting literature is nonauthoritative.  The following paragraphs provide descriptions of recently adopted or newly issued but not yet effective accounting standards that could have a material effect on the Company’s financial position or results of operations.

 

In February 2016, FASB amended FASB ASC Topic 842, Leases.  The amendments in this update address several aspects of lease accounting with the significant change being the recognition of lease assets and lease liabilities for leases previously classified as operating leases.  The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted.  The Company has several lease agreements for which the amendments will require the Company to recognize a lease liability to make lease payments and a right-of-use asset which will represent its right to use the

 

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

underlying asset for the lease term.  The Company is currently reviewing the amendments to ensure it is fully compliant by the adoption date and does not expect to early adopt.  The impact is expected to have a material effect on the Company.  The Company is currently in the process of fully evaluating the amendments and will subsequently implement new processes.  For additional information on the Company’s leases, see *Note 11*.

 

In May 2014, FASB amended FASB ASC Topic 606, *Revenue from Contracts with Customers*.   The amendments clarify the principals for recognizing revenue and develop a common revenue standard among entities.  The new guidance establishes the following core principal:  recognize revenue to depict the transfer of promised good or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for good or services.  Five steps are provided for a company to follow to achieve such core principal.  The new guidance also includes a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The entity should apply the amendments using one of two retrospective methods described in the amendment.  Accounting Standards update No. 2015-14, *Revenue from Contracts with Customers*(Topic 606) delayed the effective date for public entities to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.  Several subsequent amendments have been issued that provide clarifying guidance and are effective with the adoption of the original update.  Early application is permitted only as of annual reporting periods beginning December 15, 2016, including interim reporting periods within that reporting period.  The Company is in its preliminary stages of evaluating the impact of these amendments, although it doesn’t expect the amendments to have a significant impact on the Company’s financial position or results of operation.  The amendments could potentially impact the accounting procedures and processes over the recognition of certain revenue sources.  The Company is expecting to begin developing processes and procedures to ensure it is fully compliant with these amendments at the date of adoption.

 

In January 2017, FASB amended FASB ASC Topic 350, *Simplifying the Test for Goodwill*.  The amendments in the update simplify the measurement of goodwill by eliminating Step 2 from the goodwill impairment test.  Instead, under these amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.  An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit.  The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The Company has goodwill from prior business combinations and performs an annual impairment test or more frequently if changes or circumstances occur that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value.  During the current year, the Company performed its impairment assessment and determined the fair value of the aggregated reporting units exceed the carrying value, such that the Company’s goodwill was not considered impaired.  Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment, it is unlikely that an impairment amount would need to be calculated and, therefore, the Company does not anticipate a material impact from these amendments to the Company’s financial position and results of operations.  The current accounting policies and processes are not anticipated to change, except for the elimination

 

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

of the Step 2 analysis.  For additional information regarding goodwill impairment testing, see *Note 1*and *Note 6*.

 

In September 2015, FASB amended FASB ASC Topic 805, *Business Combinations*.  The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined.  The amendments in this update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting has been completed at the acquisition date.  The amendments in this update require an entity to present separately on the face of the statement of operations or disclose in the notes the portion of the amount recorded in the current period earnings by line item that would have been recorded in previous reporting period if the adjustments to the provisional amounts had been recognized as of the acquisition date.  The amendments were to be applied prospectively to all periods presented and were effective for public business entities for annual periods and interim periods within those annual periods, beginning after December 15, 2015.  The Company has evaluated the impact of these amendments and the amendments do not have a material effect on the Company’s financial position or results of operations.  For additional information on acquisitions, see *Note 14*.

 

**Note 2:**                                     **Net Patient Service Revenue**

 

The Company has agreements with third-party payers that provide for payments to the Company at amounts different from its established rates.  The payment arrangements include:

 

*Medicare.*  The Company is paid under a prospective payment system for Medicare Part A services.  Under the prospective payment system there is no additional settlement on the difference between the interim per diem rates paid and actual costs.  The Company is paid on a fee schedule basis for Medicare Part B therapy services.  There will be no additional settlement on the difference between payments received and actual costs for Part B therapy services.

 

*Medicaid.*  The Company is reimbursed for services rendered to Title XIX Medicaid patients primarily on the basis of a flat rate per patient day based on the level of medical care provided to the patient.  In 2015, Medicaid services in the state of Texas transitioned to managed care.  The Company has entered into payment agreements with managed care organizations that have contracts with the state health and human services commission.

 

Approximately 63%, 69% and 73% of net patient service revenue are from participation in the Medicare and state-sponsored Medicaid programs for the years ended December 31, 2016, 2015 and 2014, respectively.

 

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation and change.  As a result, it is reasonably possible that recorded estimates will change materially in the near term.

 

The Company has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations.  The basis for

 

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

payment to the Company under these agreements includes discounts from established charges and prospectively determined daily rates.

 

**Note 3:**                                     **Property and Equipment**

 

Property and equipment consist of the following at December 31:

 
| ** **                      | ** ** | **2016**   | ** ** | **2015**   | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|
|                            |       |       |       |       |       |
| Buildings                       |       | $          | 16,886,101 |       | $          | 7,944,225 |   |
| Leasehold   improvements        |       | 17,223,550 |       | 14,320,378 |       |
| Equipment                       |       | 31,040,172 |       | 24,279,481 |       |
| Furniture and   fixtures        |       | 1,614,537  |       | 1,467,754  |       |
| Construction in   progress      |       | 1,577,773  |       | 1,877,072  |       |
|                            |       | 68,342,133 |       | 49,888,910 |       |
| Less accumulated   depreciation |       | 29,863,992 |       | 22,008,761 |       |
|                            |       |       |       |       |       |
| Property and equipment,   net   |       | $          | 38,478,141 |       | $          | 27,880,149 |   |

 

Buildings consists of capitalized leases for a skilled nursing facility and two inpatient hospice facilities more fully described in *Note 10*.

 

**Note 4:**                                     **Concentration of Credit Risk**

 

The Company grants credit without collateral to its residents, most of whom are area residents and are insured under third-party payer agreements.  The mix of receivables from residents and third-party payers at December 31, 2016 and 2015, is:

 
| ** **             | ** ** | **2016** | ** ** | **2015** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
|                   |       |     |       |     |       |
| Medicare               |       | 26       | %          | 32       | %          |
| Medicaid               |       | 28       | %          | 29       | %          |
| Private pay            |       | 5        | %          | 4        | %          |
| Commercial   insurance |       | 41       | %          | 35       | %          |
|                   |       |     |       |     |       |
|                   |       | 100      | %          | 100      | %          |

 

20

----

 

**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

**Note 5:**                                     **Investment in Affiliates**

 

In December 2010, SCC Senior Care Investments, LLC became a 6.82% member in NHP SCC LLC, a Delaware limited liability company formed in May 2010.  NHP SCC LLC leases buildings and certain real property to the operating companies included in SCC NHP Portfolio #1.  On December 31, 2015, the Company sold its membership interest for $3,100,000.  A gain of approximately $736,000 is included in other revenue on the consolidated statements of operations.  As of December 31, 2014, this real estate entity had total assets of $77,031,492, and total liabilities of $1,739,093.  For the years ended December 31, 2015 and 2014, NHP SCC LLC had net income of $2,073,051 and $1,971,876, respectively.  The Company’s investment of $2,420,770 as of December 31, 2014, was reported on the equity method of accounting.  Since, NHP SCC LLC derives all of its income from the Company, the equity interest income earned by the Company of $173,081, $164,773 for years ended December 31, 2015 and 2014, respectively, has been included as a reduction of facility rent on the consolidated statements of operations.

 

In 2012, Senior Care Centers Home Health, LLC purchased a 50% limited partnership interest in Senior Care Consultants at Home, Ltd., a Texas Limited Partnership, operating under the amended and restated agreement of limited partnership effective March 4, 2009.  The Company’s investment was reported on the equity method of accounting.  As of December 31, 2014, Senior Care Centers Home Health, LLC wrote off its 50% limited partnership interest due to declining operations.

 

On September 1, 2015, the Company purchased a 37.037% interest in Partners Pharmacy, LLC as part of Project Vegas, more fully described in *Note 14* for $2,000,000.  The Company accounts for its investment on the equity method.  Under this method, the Company’s proportionate share of net income is included in the consolidated statements of operations.  The investment shown on the consolidated balance sheets represents the initial investment, plus the Company’s pro-rata share of income since acquisition.  The income allocation for the years ended December 31, 2016 and 2015, was $650,726 and $181,129, respectively.  Since, Partners Pharmacy, LLC derives some of its income from the Company, a portion of the equity interest income earned by the Company of $232,374 and $64,682 for years ended December 31, 2016 and 2015, respectively, has been included as a reduction of other operating expenses on the consolidated statements of operations.

 

The Company’s investment exceeds the underlying equity in net assets.  This investment value has been evaluated for impairment based on future cash flows and earnings capacity, as well as the overall ability of the Company to recover its investment amount through increased marketing and integration of its services into the Company’s current operations.  The investment was not determined to be impaired and will continue to be carried at its original cost, plus allocated earnings.

 

21

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

**Note 6:**                                     **Acquired Intangible Assets and Liabilities and Goodwill**

 

The carrying basis and accumulated amortization of recognized intangible assets and liabilities at December 31, 2016 and 2015, were:

 
| ** **                               | ** ** | **2016**                      | ** ** | **2015**                       | ** ** |
|------------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **Gross   Carrying   Amount** | ** ** | **Accumulated   Amortization** | ** ** | **Gross   Carrying   Amount** | ** ** | **Accumulated   Amortization** | ** ** |
|                                     |       |                          |       |                           |       |   |   |   |   |
| Amortized   intangible assets            |       |                          |       |                           |       |   |   |   |   |
| Favorable leases                         |       | $                             | 26,193,774 |                           | $          | 7,337,460 |   | $ | 26,193,774 |   | $ | 3,158,279 |   |
| Noncompete   agreements                  |       | 753,000                       |       | 263,550                        |       | 753,000 |   | 112,950 |   |
| Customer relationships                   |       | —                        |       | —                         |       | 276,000 |   | 276,000 |   |
| Leasehold   acquisition costs            |       | 3,000,000                     |       | 600,000                        |       | 3,000,000 |   | 400,000 |   |
| Less: amortized   intangible liabilities |       |                          |       |                           |       |   |   |   |   |
| Unfavorable   leases                     |       | 12,561,606                    |       | 7,960,175                      |       | 12,561,606 |   | 3,553,856 |   |
|                                     |       |                          |       |                           |       |   |   |   |   |
|                                     |       | $                             | 17,385,168 |                           | $          | 240,835 |   | $ | 17,661,168 |   | $ | 393,373 |   |

 

Amortization expense for the years ended December 31, 2016, 2015 and 2014, was $350,600, $588,950 and $200,000, respectively.  Favorable and unfavorable leases are being amortized to rental expense over the respective terms of the leases.  The net amortization of favorable and unfavorable leases resulted in a decrease of rental expense of $227,138 and $395,577 for the years ended December 31, 2016 and 2015, respectively.

 

Estimated amortization expense and additional rent expense for each of the following five years is:

 
| ** **  | ** ** | ** **       | ** ** | **Additional** | ** ** |
|-------------|------------|------------------|------------|----------------|------------|
| ** **  | ** ** | **Amortization** | ** ** | **Rent**       | ** ** |
|        |       |             |       |           |       |
| 2017        |       | $                | 350,600    |           | $          | 3,432,769 |   |
| 2018        |       | 350,600          |       | 3,432,769      |       |
| 2019        |       | 350,600          |       | 1,980,364      |       |
| 2020        |       | 237,650          |       | 1,784,875      |       |
| 2021        |       | 200,000          |       | 1,871,673      |       |
| Later years |       | 1,400,000        |       | 1,752,433      |       |
|        |       |             |       |           |       |
|        |       | $                | 2,889,450  |           | $          | 14,254,883 |   |

 

22

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

The changes in the carrying amount of goodwill for the years ended December 31, 2016 and 2015, were:

 
| ** **                          | ** ** | **2016** | ** ** | **2015**   | ** ** |
|-------------------------------------|------------|----------|------------|------------|------------|
|                                |       |     |       |       |       |
| Balance as of   January 1      |       | $        | 23,871,919 |       | $          | 4,248,767 |   |
| Goodwill   acquired during the year |       |     |       |       |       |
| Project Ranger   II                 |       | —   |       | 1,800,403  |       |
| Project Vegas                       |       | —   |       | 17,822,749 |       |
|                                |       |     |       |       |       |
| Balance as of   December 31    |       | $        | 23,871,919 |       | $          | 23,871,919 |   |

 

The goodwill recognized during 2015 is associated with various transactions and allocated to the Company as a whole.  These acquisitions are more fully described in *Note 14.*  No goodwill impairment loss has been recognized as of December 31, 2016 or 2015.

 

**Note 7:**                                     **Professional Liability Claims**

 

The Company purchases professional liability insurance on a fixed premium basis under a claims-made policy.  The Company has purchased umbrella insurance coverage for claims which may exceed coverage limits.  Accounting principles generally accepted in the United States of America require a health care provider to accrue the expense of professional liability claims costs, if any, for any reported and unreported incidents of potential improper professional service occurring during the year by estimating the probable ultimate costs of the incidents.  Losses from asserted and unasserted claims identified under the Company’s incident reporting system are estimated based on industry trends as well as other considerations, including the nature of each claim or incident and relevant trend factors.  On a quarterly basis, the Company obtains reports of asserted claims and lawsuits incurred.  This information is provided to a third party actuarial firm to assist in the evaluation of recorded accruals, which are adjusted quarterly and recorded on the consolidated balance sheets in self-insurance reserves.  It is reasonably possible that this estimate could change materially in the near term.

 

**Note 8:**                                     **Health Insurance**

 

The Company self-insures the health benefits provided to its employees under a group program.  The program provides health benefits to the employees of the Company.  The Company entered into a contract with a third-party administrator (TPA) to administer this program.  The Company entered into a stop-loss insurance contract to protect assets against significant claims expense.  Specific stop-loss insurance provides coverage on individual claims incurred in excess of $250,000, $200,000 and $175,000 at December 31, 2016, 2015 and 2014, respectively.  Aggregate

 

23

----

 

**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

stop-loss insurance provides coverage on aggregate claims based on a monthly factor and the number of covered units.  Estimated amounts are remitted to the TPA periodically.  Estimated costs are charged to income when incurred and accrued on the consolidated balance sheets in self-insurance reserves.  It is reasonably possible that the Company’s estimate of incurred costs could change materially in the near term.

 

**Note 9:**                                     **Workers’ Compensation Insurance**

 

The Company is a nonsubscriber to the Texas workers’ compensation insurance system, and has entered into a contract with a TPA to administer this self-insured plan.  The Company has accrued an estimated liability relating to unasserted workers’ compensation claims on the consolidated balance sheets in self-insurance reserves based on an actuarial report prepared by a third party.  It is reasonably possible that the Company’s estimate of losses could change by a material amount in the near term.

 

**Note 10:**                              **Long-Term Debt**

 
| ** **                                           | ** ** | **2016**    | ** ** | **2015**    | ** ** |
|------------------------------------------------------|------------|-------------|------------|-------------|------------|
|                                                 |       |        |       |        |       |
| Line of credit -   SCC Granite Portfolio #2 (A)      |       | $           | 2,430,413  |        | $          | 2,430,413 |   |
| Line of credit -   Project Ranger II (B)             |       | 60,859,044  |       | 79,709,044  |       |
| Notes payable   (C)                             |       | —      |       | 625,000     |       |
| Note payable -   Project Vegas (D)              |       | 15,000,000  |       | 19,000,000  |       |
| Note payable -   Project Ranger (E)             |       | 10,563,633  |       | 19,400,000  |       |
| Note payable   (F)                              |       | 5,000,000   |       | —      |       |
| Capital lease   obligation - Mesa Vista building (G) |       | 9,981,491   |       | 10,536,830  |       |
| Capital lease   obligations - buses and beds (H)     |       | 2,058,739   |       | 725,692     |       |
| Capital lease   obligation - Shreveport building (I) |       | 5,439,510   |       | —      |       |
| Capital lease   obligation - Minden building (J)     |       | 3,333,893   |       | —      |       |
|                                                 |       | 114,666,723 |       | 132,426,979 |       |
| Less unamortized   debt issuance costs               |       | 1,382,774   |       | 1,674,629   |       |
| Less current   maturities                            |       | 23,687,504  |       | 13,040,923  |       |
|                                                 |       |        |       |        |       |
|                                                 |       | $           | 89,596,445 |        | $          | 117,711,427 |   |

 

24

----

 

**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

----

(A)               In December 2009, SCC Granite Portfolio #2 entered into a $2,500,000 revolving line of credit with The PrivateBank and Trust Company.  In December 2013, the line was extended through December 31, 2017, and the amount was amended to $2,000,000.  In March 2014, the amount was amended back to $2,500,000.  The line is collateralized by substantially all of the Company’s assets.  Monthly interest payments are based on the higher of either the base rate plus the applicable base rate margin, or LIBOR base rate plus applicable LIBOR margin (approximately 5.26% at December 31, 2016).  The Company is required to pay a fee of 3.5% per annum on any outstanding letters of credit, up to $500,000 available, issued in connection with the revolving line.  No letters of credit were issued as of December 31, 2016 and 2015.  The line of credit requires compliance with certain restrictive covenants, which includes maintaining a fixed charge coverage ratio.

 

(B)               On April 1, 2015, the Company entered into a $68,000,000 revolving loan commitment, with a $15,000,000 sublimit for the issuance of standby letters of credit with The PrivateBank as the lead arranger as part of an overall credit and security agreement.  The revolving loan commitment expires on April 1, 2020.  During 2016 and 2015, the Company entered into multiple modifications of the revolving loan commitment with various lenders that increased the lending commitment to $92,500,000.  Monthly interest payments are based on the sum of the LIBOR rate plus the applicable LIBOR margin, with a floor of 4.0% (approximately 4.62% at December 31, 2016). The Company is required to pay a fee of 3.75% for each letter of credit issued.  Letters of credit issued and outstanding as of December 31, 2016 and 2015, were $3,244,552.  The line is collateralized by all of the Company’s assets.  The agreement requires compliance with certain restrictive covenants, including a minimum EBITDA, minimum current ratio, fixed charge coverage ratio and maximum senior leverage ratio.  The revolving loan commitment was amended subsequent to year end, see Note 18.

 

(C)               In July 2013, the Company executed a $5,000,000 unsecured promissory note offering and entered into a master loan agreement with various individual lenders.  Beginning April 1, 2014, semiannual principal payments of $625,000 are due, with the final semiannual payment due on maturity on September 30, 2017.  Monthly payments of interest on the unpaid principal balance are payable at a rate of 12%.  The agreement requires compliance with certain restrictive covenants, including a quarterly debt service coverage ratio and aggregate indebtedness limitation.  During 2016, the note was paid in full.

 

(D)               In September 2015, the Company executed a $20,000,000 unsecured promissory note offering with a lessor.  Beginning October 1, 2015, principal payments of $333,333 plus interest are due monthly, with the final monthly payment due on maturity on September 1, 2020.  Interest rates are stated but vary by loan year and range from 5% to 6%, plus the applicable LIBO rate (approximately 6.1% at December 31, 2016).  The line of credit requires compliance with certain restricted covenants, which include maintaining stated amounts of liquidity and adjusted consolidated EBITDAR, as well as maintaining a leverage ratio below maximum.

 

25

----

 

**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

***Liquidity Considerations***

 

Due to the acceleration of payment of certain obligations in December for tax planning purposes,   the Company failed to meet the liquidity covenant contained in one of its debt agreements as of December 31, 2016, for which it obtained a waiver from the debt holder.  Management will continue to manage its cash flows to meet the minimum liquidity requirements and has also requested that the debt holder lower the liquidity threshold, increasing the likelihood that such levels will be achieved going forward.  Management believes it’s probable that these plans will be effectively implemented to meet the required liquidity covenant in its future quarterly calculations.  In addition, the Company has a term note coming due within the year (Item (E) below).  The Company has received a letter of intent from an existing debt holder to refinance this term note with structured terms of six months with an additional six month extension option.  Based on the Company’s relationship with this existing debt holder, management believes the terms of the letter of intent to refinance the term note will be successful and the principal balance will effectively not be due prior to one year from issuance date of its consolidated financial statements.

 

(E)                On April 1, 2015, the Company entered into a $25,000,000 term loan with The PrivateBank as part of an overall credit and security agreement.  Beginning July 1, 2015, principal payments of $1,250,000 are due quarterly.  The note bears interest based on LIBOR plus the applicable LIBOR margin, and matures on April 1, 2020 (approximately 5.87% at December 31, 2016).  The agreement requires compliance with certain restrictive covenants, including a minimum EBITDA, minimum current ratio, fixed charge coverage ratio and maximum senior leverage ratio.  The term loan was amended subsequent to year end to accelerate the maturity date to February 28, 2017.  The balance is included in current maturities of long-term debt at December 31, 2016, see *Note 18*.

 

(F)                 In February 2016, the Company executed a $5,000,000 unsecured promissory note with a related party.  All outstanding principal and interest of the promissory note is payable within ninety days from origination, but is subject to additional thirty day extensions.  The Company must pay an extension fee of 1% of the outstanding principal amount to utilize extension periods.  Interest is payable at a rate of 15%.  The promissory note was amended in June 2016, and required monthly interest payments commencing June 25, 2016.  The note was amended subsequent to year end, see Note 18, to accelerate the maturity date to the earlier of the full funding of the equity offering (fully described in Note 1) or March 31, 2017.  The balance is included in current maturities of long-term debt at December 31, 2016.

 

(G)               The Company has entered into a capital lease for one skilled nursing facility it operates effective April 1, 2015, that will expire in December 2024, at an imputed interest rate of 11.5%.

 

(H)              The Company has entered into various capital leases for vehicles, furniture and equipment, expiring at various dates between 2017 through 2020.

 

(I)                   The Company has entered into a capital lease for a hospice facility in Shreveport, Louisiana, that is effective March 2016, that will expire in September 2020, at an imputed interest rate of 5.6%.  The lease contains a purchase obligation at a stated price, requiring the Company to purchase the building by the end of the lease term.

 

(J)                   The Company has entered into a capital lease for a hospice facility in Minden, Louisiana, that is

 

26

----

 

**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

effective March 2016, that will expire in September 2020, at an imputed interest rate of 5.6%.  The lease contains a purchase obligation at a stated price, requiring the Company to purchase the building by the end of the lease term.

 

Unamortized debt issuance costs of $1,382,774 and $1,674,629, at December 31, 2016 and 2015, respectively, are related to the outstanding long-term debt of the Company.  The costs are amortized to interest expense over the term of the related debt.

 

Aggregate annual maturities of long-term debt and payments on capital leases at December 31, 2016, are:

 
| ** **                                       | ** ** | ** **    | ** ** | **Lease**              | ** ** |
|--------------------------------------------------|------------|---------------|------------|------------------------|------------|
| ** **                                       | ** ** | **Long-Term** | ** ** | **Obligations -** | ** ** |
| ** **                                       | ** ** | **Debt**      | ** ** | **Buildings**          | ** ** |
|                                             |       |          |       |                   |       |
| 2017                                             |       | $             | 22,845,143 |                   | $          | 2,442,872 |   |
| 2018                                             |       | 4,663,398     |       | 2,507,282              |       |
| 2019                                             |       | 4,441,622     |       | 2,573,395              |       |
| 2020                                             |       | 63,961,666    |       | 10,393,939             |       |
| 2021                                             |       | —        |       | 1,961,568              |       |
| Later years                                      |       | —        |       | 6,205,597              |       |
|                                             |       |          |       |                   |       |
|                                             |       | $             | 95,911,829 |                   | 26,084,653 |   |
| Less amount   representing interest              |       |          |       | 7,329,759              |       |
| Present value of   future minimum lease payments |       |          |       | 18,754,894             |       |
| Less current   maturities                        |       |          |       | 842,361                |       |
|                                             |       |          |       |                   |       |
| Noncurrent   portion                             |       |          |       | $                      | 17,912,533 |   |

 

Property and equipment include the following buildings under a capital lease:

 
| ** **                      | ** ** | **2016**  | ** ** | **2015** | ** ** |
|---------------------------------|------------|-----------|------------|----------|------------|
|                            |       |      |       |     |       |
| Buildings                       |       | $         | 16,886,101 |     | $          | 7,944,225 |   |
| Less accumulated   depreciation |       | 1,679,678 |       | 605,213  |       |
|                            |       |      |       |     |       |
|                            |       | $         | 15,206,423 |     | $          | 7,339,012 |   |

 

27

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

**Note 11:**               **Leases**

 

The Company leases all of the facilities they operate from certain REITs and various landlords.  The leases require the Company to pay respective executory costs, which can include property taxes, insurance, utilities and maintenance varying on the specific terms of the leases in addition to the basic rent.  The agreements also require the Company to periodically submit operational and financial information to the various lessors.  The Company has granted the lessors a security interest and a contractual lien upon all of the assets related to the operations of the Company.  The following table summarizes each of the Company’s lease agreements as of December 31, 2016:

 
| **Portfolio Name**             | ** ** | **Date of Lease**                              | ** ** | **Number   of   Facilities** | ** ** | **Lease   Term   (years)** | ** ** | **Rent Changes**                                                            | ** ** | **Security Deposit**                                 |
|-------------------------------------|------------|----------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------|
|                                |       |                                                     |       |                         |       |                       |       |                                                                             |       |                                                      |
| SCC Granite #1 (1)                  |       | October 31, 2014                                    |       | 12                           |       | 15                         |       | Decrease at the   beginning of lease years 3, 6 and 11                           |       | Cash equal to two   months’ rent                     |
| SCC Granite #1 — Crestwood (1) |       | March 31, 2014                                      |       | 2                            |       | 15                         |       | Increase 2% annually                                                             |       | None                                                      |
| SCC Granite #2 (1)                  |       | December 1, 2009                                    |       | 4                            |       | 10                         |       | Increase 2% annually                                                             |       | None                                                      |
| SCC NHP #1(1)                       |       | July 1, 2010                                        |       | 5                            |       | 15                         |       | Increase 2.5% annually                                                           |       | Letter of credit equal   to three months’ rent       |
| SCC LTC #1                          |       | August 27, 2013,   Amended November 12, 2015   |       | 11                           |       | 15                         |       | Increase 2.5% annually   through the 10th year; 3.0% annually thereafter(5) |       | Letter of credit equal   to two months’ rent         |
| SCC Sabra #1                        |       | November 1, 2014                                    |       | 1                            |       | 10                         |       | Increase 2.75% annually                                                          |       | Letter of credit equal   to $240,000                      |
| SCC Hidalgo #1                      |       | July 22, 2013                                       |       | 1                            |       | 15                         |       | Increase 2% annually   beginning in the 5th year (2)                        |       | Cash or letter of   credit equal to $240,000              |
| SCC Granite Trisun #1, #2, #4(1)    |       | January 1, 2014                                     |       | 11                           |       | 15                         |       | Increase 2% annually                                                             |       | Cash equal to two   months’ rent                     |
| Corporate Office (3)                |       | April 12, 2011                                      |       | Corporate Office             |       | 5                          |       | $0.50 per square foot   increase annually                                        |       | None                                                      |
| Corporate Office                    |       | November 1, 2014                                    |       | Corporate Office             |       | 9                          |       | Increase 3% annually                                                             |       | Cash equal to $48,339                                     |
| Paramount                           |       | February 1, 2015                                    |       | 14                           |       | 15 -17.5                   |       | Increase 1.25% - 2%   annually                                                   |       | Cash equal to one   month’s rent                     |
| CTLTC (6)                           |       | April 1, 2015 (4),   Some amended May 11, 2016 |       | 33 (7)                       |       | 2 -15                      |       | Increase 2% - 3%   annually                                                      |       | $750,000 - $2,050,000                                     |
| Momentum (1)                        |       | June 30, 2015                                       |       | 4                            |       | 10                         |       | Increase 2% annually                                                             |       | Cash or letter of   credit equal to two months’ rent |

 

28

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 
| **Portfolio Name**                  | ** ** | **Date of Lease** | ** ** | **Number of   Facilities** | ** ** | **Lease Term   (years)** | ** ** | **Rent Changes**                                    | ** ** | **Security Deposit**                                 |
|------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|-------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------|
| Rio Grande (1)                           |       | June 30, 2015          |       | 1                               |       | 15                            |       | Increase 2% annually                                     |       | Cash or letter of   credit equal to two months’ rent |
| Vegas — Nursing and assisted living |       | September 1, 2015      |       | 9                               |       | 15                            |       | Property taxes and   maintenance                         |       | Cash equal to one   month’s rent                     |
| Vegas - Hospice                          |       | September 1, 2015      |       | 4                               |       | 1-5                           |       | Stated monthly amounts                                   |       | None                                                      |
| Socorro (2)                              |       | November 12, 2015      |       | 1                               |       | 15                            |       | Increase 2% annually   beginning in the 5th year(2) |       | Cash or letter of   credit equal to $243,000              |
| Harden Pharmacy, LLC                     |       | November 1, 2012       |       | 1                               |       | 3                             |       | Increase 3% annually                                     |       | None                                                      |

 

----

(1)    Related party lessor.

(2)    The Company has the right to exercise a purchase option during the third year of the lease to purchase the building at a stated price if it so elects.

(3)    A portion of the operating lease for the initial premises of the corporate office building was canceled with an effective date of December 31, 2014. The remaining leased premises were subleased effective November 1, 2014.

(4)    On April 1, 2015, the Company acquired the equity of CTLTC Real Estate, LLC and assumed all of their existing operating leases for the skilled nursing and assisted living operations.  See further discussion of this transaction in *Note 14*.

(5)    On November 12, 2015, the master lease was amended to add two additional skilled nursing facilities included in the Cowtown portfolio.  The amendment also stated that additional rent will be calculated and paid quarterly, based on a calculation of taking 10% of gross revenues over a stated amount up to an additional rent cap of $68,411.

(6)    The Company has the right to exercise a purchase option to purchase the building at a stated price if it so elects.

(7)    Two facilities were divested during the year ended December 31, 2016.

 

Facility lease expense in the Company’s consolidated statements of operations includes minimum lease payments, straight-line expense in excess of current payments referred to as accrued facility rent expense, plus the amortization of favorable and unfavorable leases.  The information regarding rental expense on long-term operating leases is as follows.

 
| ** **                                     | ** ** | **2016**   | ** **  | **2015**   | ** ** | **2014**    | ** ** |
|------------------------------------------------|------------|------------|-------------|------------|------------|-------------|------------|
|                                           |       |       |        |       |       |        |       |
| Related party   minimum lease payments         |       | $          | 47,331,496  |       | $          | 47,503,906  |       | $ | 44,554,911 |   |
| Minimum lease   payments                       |       | 94,299,796 |        | 67,012,032 |       | 14,325,102  |       |
| Related party   accrued facility rent payments |       | (2,005,882 | )           | (2,159,808 | )          | 1,330,133   |       |
| Accrued facility   rent payments               |       | 11,036,430 |        | 7,725,041  |       | 1,755,303   |       |
|                                           |       |       |        |       |       |        |       |
|                                           |       | $          | 150,661,840 |       | $          | 120,081,171 |       | $ | 61,965,449 |   |

 

29

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

Minimum commitments on long-term noncancelable operating leases at December 31, 2016, are:

 
| ** ** | ** ** | **Related Party** | ** **  | **Other**   | ** ** | **Total**     | ** ** |
|------------|------------|------------------------|-------------|-------------|------------|---------------|------------|
|       |       |                   |        |        |       |          |       |
| 2017       |       | $                      | 45,309,118  |        | $          | 94,185,514    |       | $ | 139,494,632 |   |
| 2018       |       | 45,804,662             |        | 96,404,019  |       | 142,208,681   |       |
| 2019       |       | 45,032,699             |        | 97,235,100  |       | 142,267,799   |       |
| 2020       |       | 37,598,808             |        | 99,362,037  |       | 136,960,845   |       |
| 2021       |       | 38,000,784             |        | 101,154,884 |       | 139,155,668   |       |
| Thereafter |       | 257,701,771            |        | 720,626,427 |       | 978,328,198   |       |
|       |       |                   |        |        |       |          |       |
|       |       | $                      | 469,447,842 |        | $          | 1,208,967,981 |       | $ | 1,678,415,823 |   |

 

**Note 12:**               **Retirement Plan**

 

The Company has a 401(k) plan covering substantially all employees.  Under the retirement plan the Company can elect to match 50% of employee contributions up to 6% of each employee’s salary.  The Company has not elected to contribute the discretionary match of employee contributions for the years ended December 31, 2016, 2015 and 2014.

 

**Note 13:**               **Related Party Transactions**

 

***Leases***

 

The following table summarizes the operating portfolios that lease certain skilled nursing and assisted living buildings from lessors who are related to the Company through common ownership, at December 31, 2016.  See further discussion of leasing arrangements in *Note 11.*

 
| **Portfolio Name**     | ** ** | **Number of   Facilities** | ** ** | **Number of   Beds** | ** ** |
|-----------------------------|------------|---------------------------------|------------|---------------------------|------------|
|                        |       |                            |       |                      |       |
| SCC Granite #1   (1)        |       | 14                              |       | 1,771                     |       |
| SCC Granite #2              |       | 4                               |       | 484                       |       |
| SCC Granite   Trisun #1 (2) |       | 3                               |       | 366                       |       |
| SCC Granite   Trisun #2     |       | 3                               |       | 378                       |       |
| SCC Granite   Trisun #4     |       | 5                               |       | 624                       |       |
| Momentum                    |       | 4                               |       | 504                       |       |
| Rio Grande                  |       | 1                               |       | 180                       |       |

 

----

(1)  Includes twelve skilled nursing facilities and two assisted living facilities

(2) Includes two skilled nursing facilities and one assisted living facility

 

30

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

SCC Senior Care Investments, LLC was a 6.82% member in NHP SCC LLC (a lessor) which leased buildings and certain real property to the operating companies in SCC NHP Portfolio #1 until December 31, 2015.  See further discussion in *Note 5*.

 

The related party accrued facility rent liability is included as a separate line on the consolidated balance sheets, and the related party rent expense and related party accrued facility rent expense are included as separate lines on the consolidated statements of operations.

 

***Notes Payable***

 

At December 31, 2016 and 2015, the Company has notes payable to various investors (see *Note 10* — F and C, respectively, and *Note 18*) of $5,000,000 and $625,000, respectively.  Interest expense for these notes payable for the years ended December 31, 2016, 2015 and 2014, was approximately $291,000, $223,000 and $487,000, respectively.

 

**Note 14:**                              **Business Combinations**

 

**Project Ranger - 2014**

 

On January 1, 2014, the Company entered into an agreement to combine the operations of Senior Rehab Solutions, LLC with Harden Therapy, LLC, the previous therapy provider for the managed facilities that Senior Care Center Management, LLC started managing effective January 1, 2014. Harden Therapy, LLC was a subsidiary of CTLTC (the “Seller”) prior to this transaction.  As a result of this acquisition, Senior Rehab Solutions, LLC will have an opportunity to increase the amount of therapy services provided, as the surviving company will provide therapy services to the additional 28 managed skilled nursing facilities at December 31, 2014.

 

The terms of the agreement granted the Seller a minority interest in Senior Rehab Solutions, LLC, and the Company retained an 85% ownership interest of the surviving company.  Senior Rehab Solutions, LLC amended its original operating agreement to include a limited put right for the Seller to require Senior Rehab Solutions, LLC to purchase the 15% minority interest for an amount based on a defined calculation if certain conditions arise.  The amended agreement also contains a mandatory put right in favor of the Company that allows the Company to purchase the minority interest in the surviving company for a stated price if it so elects.  See further discussion of the Company’s purchase of the minority interest in 2015 below.

 

Tangible and intangible assets and liabilities transferred as a result of the agreement were minimal in value.  The only consideration exchanged was granting the Seller a 15% minority interest in Senior Rehab Solutions, LLC.  The fair value of the minority interest was calculated using an EBITDA multiple based on recent acquisitions in the therapy industry for like kind companies.   Goodwill in the amount of $4,248,767 was recorded as a result of the transaction, and consists largely of the synergies and economies of scale expected from combining the operations.  None of the goodwill resulting from the transaction will be deductible for tax purposes.

 

31

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

**Project Ranger II - 2015**

 

On April 1, 2015, the Company acquired 100% of the outstanding membership units of CTLTC Real Estate, LLC.  After the transfer of membership interests, the Company began operating the 28 skilled nursing facilities and eight assisted living facilities that it previously managed, acquired a pharmacy company and the 15% minority interest of Senior Rehab Solutions, LLC discussed above.  As a result of the acquisition, the Company will have an opportunity to grow its portfolio of senior living operations in the state of Texas.

 

The goodwill of $1,800,403 arising from the acquisition consists largely of the addition of the pharmacy company expertise which expands the Company’s ancillary service line, which will lead to additional synergies and economies of scale in existing operations.

 

Consideration paid for the membership units totaled $41.5 million, which includes contingent consideration of $1,250,000 was received by the Company based on a working capital adjustment calculated 60 days after the effective date of the transaction.  In addition, CTLTC real estate owed the Company $11,461,432 for management fees, payroll costs and rehabilitation therapy services, which was settled by the Company and recorded as part of the consideration transferred.

 

The following table summarizes the consideration paid and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.  Based on a third-party valuation, acquired identifiable intangible assets and liabilities included favorable and unfavorable leases, noncompete agreements and customer relationships.  The net fair value of the acquired identifiable intangible assets and liabilities was $14,661,168.

 

32

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 
| **Fair   Value of Consideration Transferred**                                    |   |       |       |
|----------------------------------------------------------------------------------|--------|------------|------------|
|                                                                             |   |       |       |
| Cash                                                                             |   | $          | 41,520,015 |   |
| Settlement of   pre-existing receivables due from acquiree                       |   | 11,461,432 |       |
|                                                                             |   |       |       |
| Total                                                                            |   | 52,981,447 |       |
|                                                                             |   |       |       |
| **Recognized   Amounts of Identifiable Assets Acquired and Liabilities Assumed** |   |       |       |
|                                                                             |   |       |       |
| Current assets                                                                   |   | 26,345,087 |       |
| Restricted cash                                                                  |   | 4,398,517  |       |
| Property, plant   and equipment                                                  |   | 14,619,624 |       |
| Vendor and   lessor deposits                                                     |   | 6,702,448  |       |
| Identifiable   intangible assets                                                 |   |       |       |
| Favorable leases                                                                 |   | 26,193,774 |       |
| Noncompete   agreements                                                          |   | 753,000    |       |
| Customer   relationships                                                         |   | 276,000    |       |
|                                                                             |   |       |       |
| Current   liabilities                                                            |   | 10,143,363 |       |
| Unfavorable   leases                                                             |   | 12,561,606 |       |
| Capital lease   liability                                                        |   | 11,381,887 |       |
|                                                                             |   |       |       |
| Total   identifiable net assets                                                  |   | 45,201,594 |       |
|                                                                             |   |       |       |
| Consideration   transferred in excess of total identifiable net assets           |   | 7,779,853  |       |
|                                                                             |   |       |       |
| Fair value of   noncontrolling interest                                          |   | 5,979,450  |       |
|                                                                             |   |       |       |
| **Goodwill**                                                                     |   | $          | 1,800,403  |   |

 

The fair value of the current assets acquired includes receivables with an estimated fair value of $23,113,850.  The gross amounts due under the contracts is $32,865,952, of which $9,752,102 is expected to be uncollectible.

 

33

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

**Project Vegas - 2015**

 

On September 1, 2015, the Company entered into an agreement, which included the purchase of the equity of four hospice facilities and all of the assets of a rehabilitation therapy company, located in Louisiana.  In addition, the agreement included the opportunity for the Company to enter into Exit Operations Transfer Agreements and lease agreements for eight long-term care facilities and one assisted living facility for which no consideration was transferred.  As a result of the acquisition, the Company will have an opportunity to further diversify its operating portfolio with the addition of a hospice specialty and expand the geographic footprint of its operations.  Additionally, the Company will have an opportunity to increase the amount of therapy services provided.

 

The goodwill of approximately $17.8 million arising from the acquisition consists largely of the new operating expertise in the hospice arena and additional rehabilitation patients, which will lead to additional synergies and economies of scale.

 

The following table summarizes the consideration paid and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.

 
| **Fair Value of Consideration Transferred**                                      |   |      |       |
|----------------------------------------------------------------------------------|--------|-----------|------------|
|                                                                             |   |      |       |
| Cash                                                                             |   | $         | 18,557,956 |   |
|                                                                             |   |      |       |
| **Recognized   Amounts of Identifiable Assets Acquired and Liabilities Assumed** |   |      |       |
|                                                                             |   |      |       |
| Accounts   receivable                                                            |   | 1,183,083 |       |
| Property, plant   and equipment                                                  |   | 127,425   |       |
|                                                                             |   |      |       |
| Current   liabilities                                                            |   | 575,301   |       |
|                                                                             |   |      |       |
| Total   identifiable net assets                                                  |   | 735,207   |       |
|                                                                             |   |      |       |
| **Goodwill**                                                                     |   | $         | 17,822,749 |   |

 

**Transfer Agreements**

 

During 2015, the Company entered into various Exit Operations Transfer Agreements and lease agreements as further disclosed in *Note 11*.  No consideration was transferred and thus no accounting implications resulted from these transactions.

 

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

**Acquisition Costs**

 

For the years ended December 31, 2015 and 2014, respectively, the Company incurred third-party acquisition-related costs related to these transaction that are included within the total amount of startup expenses of $3,281,738 and $2,561,648 shown on the consolidated statements of operations.

 

**Note 15:**                              **Disclosures About Fair Value of Assets and Liabilities**

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs.  There is a hierarchy of three levels of inputs that may be used to measure fair value:

 
| **Level 1** | Quoted prices in active markets for identical assets   or liabilities.                                                                                                                                                                                                                                         |
|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |                                                                                                                                                                                                                                                                                                           |
| **Level 2** | Observable inputs other than Level 1 prices, such as   quoted prices for similar assets or liabilities; quoted prices in markets   that are not active; or other inputs that are observable or can be   corroborated by observable market data for substantially the full term of the   assets or liabilities. |
|        |                                                                                                                                                                                                                                                                                                           |
| **Level 3** | Unobservable inputs supported by little or no market   activity and are significant to the fair value of the assets or liabilities.                                                                                                                                                                            |

 

***Fair Value of Financial Instruments***

 

The following methods were used to estimate the fair value of financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value.

 

***Cash***

 

The carrying amount approximates fair value.  The Company categorizes the fair value measurement of these assets to be Level 1.

 

***Lines of Credit and Notes Payable***

 

Fair value is estimated based on the borrowing rates currently available to the Company for bank loans or subordinated debt, as appropriate, with similar terms and maturities.

 

The lines of credit have variable interest rates; the carrying value approximates fair value at December 31, 2016 and 2015.  Based on borrowing rates currently available to the Company for term loans, management believes that the carrying value of notes payable approximates fair value at December 31, 2016 and 2015.  The Company categorized the fair value measurement of these liabilities to be Level 2.

 

35

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

***Redeemable Members’ Equity***

 

The Company’s 14% redeemable class A membership units have a fair value which approximates its liquidation value at December 31, 2016.  The Company categorizes the fair value measurement of this instrument as Level 2.

 

**Note 16:**                              **Significant Estimates and Concentrations**

 

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations.  Those matters include the following:

 

***Allowance for Net Patient Service Revenue Adjustments***

 

Estimates of allowances for adjustments included in net patient service revenue are described in *Notes 1* and*2*.

 

***General Litigation***

 

The Company is subject to claims, lawsuits and regulatory compliance penalty assessments that arise primarily in the ordinary course of business.  It is the opinion of management that the disposition or ultimate resolution of such claims, lawsuits and assessments will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company.

 

***Self-Insurance***

 

Estimates related to the accrual of insurance claims are described in *Notes 8* and*9*.

 

***Current Economic Conditions***

 

Due to the current regulatory environment, economic uncertainties and the growing pressures on the budgets of both the state and federal governments, it is possible that Medicare and Medicaid reimbursement could change in the near term which could impact the financial results and cash flows of the Company.  The values of assets and liabilities recorded in the consolidated financial statements could change rapidly, resulting in material future adjustments.

 

36

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**Senior Care Centers, LLC**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2016, 2015 and 2014**

 

**Note 17:**                              **Commitments**

 

The Company entered into an agreement to lease two inpatient hospice facilities in Louisiana upon the completion of construction which occurred in March 2016.  The lease term is five years, and the rents payable increase 3% annually, with initial monthly rent of $53,333.  The lease includes an obligation that the Company must purchase the premises for $8,000,000 between September 2016 and the expiration of the lease in September 2020.  The leases are recorded as capital leases more fully described in *Note 10*.

 

**Note 18:**                              **Subsequent Events**

 

Subsequent to year end, the Company amended various long-term debt agreements.  The revolving loan commitment described in *Note 10 (B*) was amended, which reduced the maximum loan commitment to $67,500,000.  In addition, the term loan maturity date as described in *Note 10 (E) *was amended to February 28, 2017.  The financial loan covenants were amended for these agreements, which included removing the minimum EBITDA requirement and maximum senior leverage ratio.

 

The promissory note described in *Note 10 (F)* was amended in January 2017.  The Company paid a principal reduction payment in the amount of $3,000,000, all outstanding accrued interest, and a fee in the amount of 1% of the remaining outstanding principal.  The remaining principal is required to be paid by the earlier of the full funding of the Company’s equity offering (fully described in *Note 1*) or March 31, 2017.

 

Additional capital was raised related to the equity solicitation described in *Note 1* after December 31, 2016.  The Company raised an additional $3,902,000 through the issuance of 975,500 Class A membership units.

 

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