Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - Summit Healthcare REIT, Inctm205270d1_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Summit Healthcare REIT, Inctm205270d1_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Summit Healthcare REIT, Inctm205270d1_ex31-1.htm
EX-23.2 - EXHIBIT 23.2 - Summit Healthcare REIT, Inctm205270d1_ex23-2.htm
EX-23.1 - EXHIBIT 23.1 - Summit Healthcare REIT, Inctm205270d1_ex23-1.htm
EX-21.1 - EXHIBIT 21.1 - Summit Healthcare REIT, Inctm205270d1_ex21-1.htm
EX-4.5 - EXHIBIT 4.5 - Summit Healthcare REIT, Inctm205270d1_ex4-5.htm
10-K - FORM 10-K - Summit Healthcare REIT, Inctm205270d1_10k.htm

 

Exhibit 99.1

 

FERNHILL ESTATES, LLC

PACIFIC GARDENS ESTATES, LLC

SHERIDAN CARE CENTER, LLC

Oregon

 

COMBINED FINANCIAL STATEMENTS

For the Year Ended December 31, 2019

 

 

 

 

FERNHILL ESTATES, LLC, PACIFIC GARDENS ESTATES, LLC,

AND SHERIDAN CARE CENTER, LLC

 

TABLE OF CONTENTS

For the Year Ended December 31, 2019

 

Page

 

INDEPENDENT AUDITOR’S REPORT   1 – 2 
      
FINANCIAL STATEMENTS     
Combined Balance Sheet   3 
Combined Statement of Income and Changes in Member’s Equity   4 
Combined Statement of Cash Flows   5 
Notes to Combined Financial Statements   6 – 9 
      
SUPPLEMENTARY INFORMATION     
Combining Balance Sheet   10 
Combining Statement of Income and Changes in Members’ Equity   11 
Combining Statement of Cash Flows   12 

 

 

 

 

Logo Updated

 

Independent Auditor’s Report

 

Board of Directors and Stockholders

Dakavia Management Corp

Salem, Oregon

 

Report on the Combined Financial Statements

 

We have audited the accompanying combined financial statements of Fernhill Estates LLC, Pacific Garden LLC, and Sheridan Care Center LLC, subsidiaries of Dakavia Management Corp, which comprise the combined balance sheet as of December 31, 2019, and the related combined statements of income and changes in members’ equity, and cash flows for the year then ended, and the related notes to the combined financial statements.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these combined 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 combined 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 combined 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 combined financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the combined 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 combined 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 combined financial statements.

 

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

 

 

 

 

INDEPENDENT AUDITOR’S REPORT (Continued)

 

Opinion

 

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Fernhill Estates LLC, Pacific Garden LLC, and Sheridan Care Center LLC as of December 31, 2019, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

Emphasis of Matter

 

As discussed in Note 1, the financial statements present only Fernhill Estates LLC, Pacific Garden LLC, and Sheridan Care Center LLC, and do not purport, and do not, present fairly the financial position of Dakavia Management, Inc. as of December 31, 2019 and results of its operations and cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter.

 

Report on Supplementary Information

 

Our audits were conducted for the purpose of forming an opinion on the combined financial statements as a whole. The supplemental combining information is presented for purposes of additional analysis and is not a required part of the combined financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the combined financial statements. The information has been subjected to the auditing procedures applied in the audit of the combined financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the combined financial statements or to the combined financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the combined financial statements as a whole.

 

Boldt Carlisle + Smith 

Certified Public Accountants 

Salem, Oregon 

February 28, 2020

 

 

 

 

FINANCIAL STATEMENTS

 

 

 

 

 

FERNHILL ESTATES, LLC, PACIFIC GARDENS ESTATES, LLC,

AND SHERIDAN CARE CENTER, LLC

 

COMBINED BALANCE SHEET

December 31, 2019

 

ASSETS     
CURRENT ASSETS     
Cash and cash equivalents  $244,751 
Accounts receivable, net   1,634,095 
Inventory   5,873 
Prepaid expenses   92,578 
Escrow accounts held by landlords   140,008 
Other current assets   3,958 
      
TOTAL CURRENT ASSETS   2,121,263 
      
NONCURRENT ASSETS     
Receivables from related parties   2,511,417 
Deposits   420,000 
Property and equipment, net   951,120 
      
TOTAL NONCURRENT ASSETS   3,882,537 
      
TOTAL ASSETS  $6,003,800 
      
LIABILITIES AND EQUITY     
CURRENT LIABILITIES     
Accounts payable  $391,838 
Accrued expenses   518,147 
Current portion of long-term debt   5,023 
      
TOTAL CURRENT LIABILITIES   915,008 
      
LONG-TERM LIABILITIES     
Long-term debt   2,208 
      
TOTAL LIABILITIES   917,216 
      
EQUITY     
Member's equity   5,086,584 
      
TOTAL EQUITY   5,086,584 
      
TOTAL LIABILITIES AND EQUITY  $6,003,800 

 

See accompanying notes

 

 

 

 

FERNHILL ESTATES, LLC, PACIFIC GARDENS ESTATES, LLC,

AND SHERIDAN CARE CENTER, LLC

 

COMBINED STATEMENT OF INCOME AND CHANGES IN

MEMBERS' EQUITY

For the Year Ended December 31, 2019

 

REVENUES    $14,400,202 
      
EXPENSES     
Administration and general   1,824,181 
Environmental services   962,045 
Dietary     816,044 
Social services   140,367 
Activities   82,853 
Nursing   6,839,261 
Property and related   2,133,111 
Depreciation   90,167 
      
TOTAL EXPENSES   12,888,029 
      
OPERATING INCOME   1,512,173 
      
OTHER INCOME AND EXPENSES     
Miscellaneous income   52,882 
Oregon provider tax   (997,769)
Miscellaneous expenses   (18,070)
      
TOTAL OTHER INCOME AND EXPENSES   (962,957)
      
Net income   549,216 
Member's equity - beginning   4,637,368 
Distributions to member   (100,000)
      
Member's equity - ending  $5,086,584 

 

See accompanying notes

 

 

 

 

FERNHILL ESTATES, LLC, PACIFIC GARDENS ESTATES, LLC,

AND SHERIDAN CARE CENTER, LLC

 

COMBINED STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2019

 

CASH FLOWS FROM OPERATING ACTIVITIES    
Net income  $549,216 
Adjustments to reconcile net income to net cash provided by operating activities:     
Depreciation expense   90,167 
(Increase) decrease in assets:     
Accounts receivable   (67,321)
Prepaid expenses   (5,279)
Escrow accounts held by Summit   (2,956)
Due from related parties   (120,368)
Other current assets   (23,206)
Increase (decrease) in liabilities:     
Accounts payable   44,439 
Accrued expenses   (58,891)
      
Net cash provided by operating activities   405,801 
      
CASH FLOWS FROM INVESTING ACTIVITIES     
Cash paid for purchases of property and equipment   (309,992)
      
Net cash (used in) investing activities   (309,992)
      
CASH FLOWS FROM FINANCING ACTIVITIES     
Distributions   (100,000)
Principal payments on long term debt   (7,683)
      
Net cash (used in) financing activities   (107,683)
      
(Decrease) in cash   (11,874)
Cash - beginning of year   256,625 
      
Cash - end of year  $244,751 
      
SUPPLEMENTAL CASH FLOW DISCLOSURE     
Interest paid  $5,440 

  

See accompanying notes

 

 

 

 

FERNHILL ESTATES, LLC, PACIFIC GARDENS ESTATES, LLC,

AND SHERIDAN CARE CENTER, LLC

 

NOTES TO COMBINED FINANCIAL STATEMENTS

December 31, 2019

 

1.            Summary of business operations and significant accounting principles and policies

 

(a)Description of business

 

Fernhill Estates, LLC, Pacific Gardens Estates, LLC, and Sheridan Care Center, LLC (the Companies) are single-member LLC’s wholly owned by Dakavia Management Corp. The Companies operate skilled nursing facilities within Oregon.

 

The combined financial statements include the accounts of the three companies which operate under a single master lease with three wholly-owned subsidiaries of Summit Healthcare REIT, Inc. as landlords. All significant intercompany accounts and transactions have been eliminated in combination.

 

(b)Concentration of credit risk

 

The Companies have deposits with one financial institution which are insured by the Federal Deposit Insurance Corporation up to $250,000. Account balances did not exceed federally insured limits during 2019.

 

(c)Cash equivalents

 

For purposes of reporting cash flows, cash includes cash on hand, checking, savings, and money market accounts.

 

(d)Receivables

 

The Companies maintain allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management uses a set percentage of billings to determine the amount of allowances to accrue. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable.

 

(e)Inventory

 

Inventory consists of supplies which are stated at cost.

 

(f)Depreciation of property and equipment

 

Property and equipment are stated at cost less accumulated depreciation computed using the straight-line and accelerated methods over 3 to 39 years.

 

(g)Income taxes

 

As limited liability companies, the Companies are not taxpaying entities for federal income tax purposes. Accordingly, the Companies’ taxable income or loss are allocated to their members in accordance with their respective percentage ownership. Therefore, no provision or liability for income taxes has been included in the accompanying financial statements.

 

 

 

 

NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)

 

1.Summary of business operations and significant accounting principles and policies (continued)

 

(h)Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

(i)Risk management

 

The Companies are exposed to various risks of loss related to errors and omissions; automobile; damage to and destruction of assets; bodily injury; and worker’s compensation for which the Companies carry commercial insurance. There has been no significant reduction in insurance coverage from the prior year and settled claims have not reached the level of commercial coverage in any of the past three fiscal years.

 

(j)Revenue recognition

 

Effective January 1, 2018, the Companies adopted accounting guidance, issued by the Financial Accounting Standards Board (“FASB”) in May 2014, clarifying the principles for recognizing revenue from certain contracts with customers. Management has evaluated the nature of services provided by the Companies and has determined the adoption of this guidance was not material to the Company’s financial statements.

 

(k)Subsequent events

 

Management has evaluated events subsequent to year end through February 28, 2020 which is the date that the financial statements were available to be issued, for possible disclosure in the financial statements.

 

2.Receivables

 

Accounts receivables  $1,644,092 
Other receivables   7,364 
Allowance for doubtful accounts   (17,361)
      
   $1,634,095 

 

Receivables accounts over 90 days past due at December 31, 2019 were $245,555.

 

 

 

 

NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)

 

3.            Property and equipment

 

Leasehold improvements  $969,274 
Furniture and fixtures   119,511 
Machinery and equipment   226,502 
      
    1,315,287 
Less accumulated depreciation   (364,167)
      
   $951,120 

 

Depreciation charged to operations for 2019 amounted to $90,167.

 

4.            Related party balances and transactions

 

The Companies are wholly owned by Dakavia Management Corp to whom they pay a management fee. The management fee effective from January 1, 2019 to February 28, 2019 was 6 percent of gross revenue and 5 percent effective March 1, 2019. Management fees for 2019 were $742,309.

 

The Companies also had receivables at year-end with Kent Emry, a shareholder in Dakavia Management Corp, and Myrtle Point Care Center, LLC, a subsidiary of Dakavia Management Corp as follows:

 

Dakavia Management Corp  $2,485,802 
Kent Emry   25,158 
Myrtle Point Care Center, LLC   457 
      
   $2,511,417 

 

The daughter of a shareholder of Dakavia Management Corp, was the Administrator at Fernhill Estates, LLC and was paid $70,000 in wages and $1,230 in bonuses during the year.

 

5.            Long-term debt

 

The Companies entered into a loan to finance the purchase of equipment with monthly payments of $450 including interest at 7.6 percent.

 

Balance at December 31, 2019  $7,231 
Current portion   (5,023)
      
Noncurrent portion  $2,208 

 

Future maturities are as follows:

 

December 31, 2020  $5,023 
December 31, 2021   2,208 

 

 

 

 

 

NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)

 

6.Lease

 

The Companies lease their respective facilities under a master lease agreement with Summit Healthcare REIT. The lease expires on July 31, 2027. Lease payments increase 2 percent annually.

 

The following is a schedule of the future minimum lease payments:

 

Year  Amount 
2020  $1,927,251 
2021   1,965,796 
2022   2,005,112 
2023   2,045,214 
2024   2,086,118 
2025 and thereafter   12,520,759 
      
   $22,550,250 

 

Rent expense for the year was $1,900,024.

 

7.Retirement plan

 

As of May 2019, Dakavia Management Corp sponsored a 401(k) retirement plan which covers the employees of the Companies, as well as employees of other Dakavia Management Corp subsidiaries. Substantially all employees are eligible and are automatically enrolled. Employee deferrals are matched at 100 percent for the first percent and half a percent of any additional contributions up to 6 percent. Employer matching contributions of $34,298 were made for 2019.

 

8.Concentration

 

The Companies provide services to residents of Oregon who are Medicaid or Medicare recipients and receives approximately 94 percent of revenue from these programs. Accordingly, the company is subject to a concentration of revenue risks related to the Oregon Medicaid and Medicare Programs.

 

 

 

SUPPLEMENTARY INFORMATION

 

 

 

FERNHILL ESTATES, LLC, PACIFIC GARDENS ESTATES, LLC,
AND SHERIDAN CARE CENTER, LLC
 
COMBINING BALANCE SHEET
December 31, 2019
 
   Fernhill Estates, LLC   Pacific Gardens Estates, LLC   Sheridan Care Center, LLC   Subtotals   Eliminations   Totals 
ASSETS                              
CURRENT ASSETS                              
Cash and cash equivalents  $87,712   $61,844   $95,195   $244,751   $-   $244,751 
Accounts receivable, net   401,280    727,997    504,818    1,634,095    -    1,634,095 
Inventory   1,441    1,701    2,731    5,873    -    5,873 
Prepaid expenses   25,317    42,032    25,229    92,578    -    92,578 
Escrow accounts held by landlords   58,615    27,108    54,285    140,008    -    140,008 
Other current assets   -    1,826    2,132    3,958    -    3,958 
                               
TOTAL CURRENT ASSETS   574,365    862,508    684,390    2,121,263    -    2,121,263 
                               
NONCURRENT ASSETS                              
Receivables from related parties   1,296,506    480,197    2,388,570    4,165,273    (1,653,856)   2,511,417 
Deposits   113,706    205,000    101,294    420,000    -    420,000 
Property and equipment, net   302,114    318,522    330,484    951,120    -    951,120 
                   -           
TOTAL NONCURRENT ASSETS   1,712,326    1,003,719    2,820,348    5,536,393    (1,653,856)   3,882,537 
                               
TOTAL ASSETS  $2,286,691   $1,866,227   $3,504,738   $7,657,656   $(1,653,856)  $6,003,800 
                               
LIABILITIES AND EQUITY                              
CURRENT LIABILITIES                              
Accounts payable  $59,218   $189,427   $143,193   $391,838   $-   $391,838 
Accrued expenses   143,198    241,397    133,552    518,147    -    518,147 
Due to related parties   -    1,323,719    330,137    1,653,856    (1,653,856)   - 
Current portion of long-term debt   -    5,023    -    5,023    -    5,023 
                               
TOTAL CURRENT LIABILITIES   202,416    1,759,566    606,882    2,568,864    (1,653,856)   915,008 
                               
LONG-TERM LIABILITIES                              
Long-term debt   -    2,208    -    2,208    -    2,208 
                               
TOTAL LIABILITIES   202,416    1,761,774    606,882    2,571,072    (1,653,856)   917,216 
                               
EQUITY                              
Member's equity   2,084,275    104,453    2,897,856    5,086,584    -    5,086,584 
                               
TOTAL EQUITY   2,084,275    104,453    2,897,856    5,086,584    -    5,086,584 
                               
TOTAL LIABILITIES AND EQUITY  $2,286,691   $1,866,227   $3,504,738   $7,657,656   $(1,653,856)  $6,003,800 

 

 

 

FERNHILL ESTATES, LLC, PACIFIC GARDENS ESTATES, LLC,
AND SHERIDAN CARE CENTER, LLC
 
COMBINING STATEMENT OF INCOME AND CHANGES IN
MEMBERS' EQUITY
For the Year Ended December 31, 2019
                 
   Fernhill Estates, LLC   Pacific Gardens Estates, LLC   Sheridan Care Center, LLC   Totals 
REVENUES  $3,715,300   $6,549,666   $4,135,236   $14,400,202 
                     
EXPENSES                    
Administration and general   478,796    797,928    547,457    1,824,181 
Environmental services   267,479    453,655    240,911    962,045 
Dietary   203,916    363,156    248,972    816,044 
Social services   41,388    71,680    27,299    140,367 
Activities   24,723    41,151    16,979    82,853 
Nursing   1,774,914    3,148,995    1,915,352    6,839,261 
Property and related   568,410    1,038,554    526,147    2,133,111 
Depreciation   23,384    43,040    23,743    90,167 
                     
TOTAL EXPENSES   3,383,010    5,958,159    3,546,860    12,888,029 
                     
OPERATING INCOME   332,290    591,507    588,376    1,512,173 
                     
OTHER INCOME AND EXPENSES                    
Miscellaneous income   15,929    26,133    10,820    52,882 
Oregon provider tax   (268,593)   (451,043)   (278,133)   (997,769)
Miscellaneous expenses   (9,706)   (6,561)   (1,803)   (18,070)
                     
TOTAL OTHER INCOME AND EXPENSES   (262,370)   (431,471)   (269,116)   (962,957)
                     
Net income   69,920    160,036    319,260    549,216 
Member's equity - beginning   2,064,355    (55,583)   2,628,596    4,637,368 
Distributions to member   (50,000)   -    (50,000)   (100,000)
                     
Member's equity - ending  $2,084,275   $104,453   $2,897,856   $5,086,584 

 

 
 

 

COMBINING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2019

 

   Fernhill Estates,
LLC
   Pacific Gardens
Estates, LLC
   Sheridan Care
Center, LLC
   Eliminations   Totals 
CASH FLOWS FROM OPERATING ACTIVITIES                         
Net income  $69,920   $160,036   $319,260   $-   $549,216 
                          
Adjustments to reconcile net income to net cash provided by operating activities:                         
Depreciation expense   23,384    43,040    23,743    -    90,167 
(Increase) decrease in assets:                         
Accounts receivable   30,584    (90,841)   (7,064)   -    (67,321)
Prepaid expenses   (1,819)   (4,153)   693    -    (5,279)
Escrow accounts held by Summit Healthcare REIT   (8,518)   37,842    (32,280)   -    (2,956)
Receivable from related parties   21,193    102,586    (175,500)   (68,647)   (120,368)
Other current assets   -    (22,574)   (632)   -    (23,206)
Increase (decrease) in liabilities:                         
Accounts payable   (19,735)   37,339    26,835    -    44,439 
Accrued expenses   (27,363)   (8,657)   (22,871)   -    (58,891)
Due to related parties   -    (116,647)   48,000    68,647    - 
                          
Net cash provided by operating activities   87,646    137,971    180,184    -    405,801 
                          
CASH FLOWS FROM INVESTING ACTIVITIES                         
Cash paid for purchases of property and equipment   (27,943)   (110,949)   (171,100)   -    (309,992)
                          
Net cash (used in) investing activities   (27,943)   (110,949)   (171,100)   -    (309,992)
                          
CASH FLOWS FROM FINANCING ACTIVITIES                         
Distributions   (50,000)   -    (50,000)   -    (100,000)
Principal payments on long term debt   (3,027)   (4,656)   -    -    (7,683)
                          
Net cash (used in) financing activities   (53,027)   (4,656)   (50,000)   -    (107,683)
                          
Increase (decrease) in cash   6,676    22,366    (40,916)   -    (11,874)
Cash - beginning of year   81,036    39,478    136,111    -    256,625 
                          
Cash - end of year  $87,712   $61,844   $95,195   $-   $244,751 
                           
SUPPLEMENTAL CASH FLOW DISCLOSURE                         
Interest paid  $1,181   $2,853   $1,406   $-   $5,440