Regional Health Properties (RHEP) Risk Analysis

The Company's common stock and Series A Preferred Stock ("securities") was listed for trading on the NYSE American under the symbol "RHE" and "RHE-PA," respectively, up until February 05, 2025 when it was suspended from trading as a result of not meeting certain listing requirements. Currently, the Company's common stock and Series A Preferred Stock is listed on the Over-the-Counter Pink Market (the "OTC Market') under the symbol "RHEP" and "RHEPA," respectively. For further information, see Note 15 - Subsequent Events to our audited consolidated financial statements included in Part II, Item 8., "Financial Statements and Supplementary Data" in this Annual Report. On the OTC Market, selling our common stock and Series A Preferred stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and any security analysts' coverage of us may be reduced. In addition, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in such securities, further limiting the liquidity of the common stock and Series A Preferred Stock. These factors could result in lower prices and larger spreads in the bid and ask prices for our securities. Such suspension from the NYSE American and continued or further declines in our share price could also greatly impair our ability to raise additional necessary capital through equity or debt financing and could significantly increase the ownership dilution to shareholders caused by our issuing equity in financing or other transactions. Any such limitations on our ability to raise debt and equity capital could prevent us from making future investments and satisfying maturing debt commitments. As a result of NYSE American suspension of trading in our common stock and Series A Preferred stock, investors may face material adverse consequences, including, but not limited to, a lack of trading market for these securities, reduced liquidity, decreased analyst coverage of these securities, and an inability for us to obtain additional financing to fund our operations. There is a limited trading market for our common stock Series A Preferred stock and the price of each may be volatile. Our common stock and Series A Preferred Stock are traded on the OTCQB marketplace under the symbol "RHEP" and "RHEPA", respectively. The OTCQB is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities and provides significantly less liquidity than a listing on the NASDAQ Stock Market or other national securities exchanges. The OTCQB securities are traded by a community of market makers that enter quotes and trade reports. This market is limited in comparison to the national stock exchanges, and any prices quoted may not be a reliable indication of the value of our common stock. Trading on the OTCQB marketplace as opposed to a national securities exchange has resulted, and may continue to result, in a reduction in some or all of the following, each of which could have a material adverse effect on the prices of our common stock, Series A Preferred Stock and our company: - the liquidity of our common stock and Series A Preferred stock;   - the market price of shares of our common stock and Series A Preferred stock;   - our ability to obtain financing for the continuation of our operations;   - the number of institutional and other investors that will consider investing in shares of our common stock;   - the number of market markers in shares of our common stock; and   - the number of broker-dealers willing to execute trades in shares of our common stock and Series A Preferred stock. In addition, the market price of our common stock could be subject to wide fluctuations in response to: - quarterly variations in our revenues and operating expenses;   - announcements of new products or services by us;   - fluctuations in interest rates;   - significant sales of our common stock and Series A Preferred stock;   - the operating and stock price performance of other companies that investors may deem comparable to us; and   - news reports relating to trends in our markets or general economic conditions.

If the Merger Agreement is adopted by SunLink's shareholders, SunLink shareholders who do not vote in favor of the approval of the Merger Agreement and who properly demand payment of fair cash value of their shares of common stock may be entitled to dissenters' rights in connection with the Merger under Title 14, Chapter 2, Article 13 of the Georgia Business Corporation Code (the "GBCC"). In addition, SunLink's obligation to consummate the Merger is subject to the condition that the holders of not more than 2,000,000 shares of SunLink common stock (excluding directors and officers of SunLink and its subsidiaries) who are entitled to, have properly exercised, and not withdrawn or waived, dissenters' rights with respect to their SunLink common stock in accordance with the GBCC prior to the effective date of the Merger.

Based on the number of shares of SunLink common stock outstanding as of as of March 25, 2025 and assuming no adjustments for any Regional Debt Distress (as defined in the Merger Agreement), we expect to issue approximately 1,597,575 shares of our common stock to SunLink shareholders pursuant to the Merger and 100,000 shares of our common stock to Mr. Robert Thornton pursuant to an employment agreement to be entered into between Mr. Thornton and Regional at the closing of the Merger. The Regional Series D Preferred Stock is convertible at any time into our common stock at an initial exchange ratio of one share of our common stock for every [three] shares of Regional Series D Preferred Stock. The actual number of shares of our common stock to be issued and reserved for issuance pursuant to the Merger will be determined at completion of the Merger based on the exchange ratio, the number of shares of SunLink common stock outstanding at that time, and the number of additional shares of Regional Series D Preferred Stock issued, if any, as a result of any Regional Debt Distress. Based on the number of shares of SunLink common stock outstanding as of March 25, 2025, the number of shares of our common stock outstanding as of March 25, 2025 and 100,000 shares of our common stock to Mr. Robert Thornton, and assuming the absence of any Regional Debt Distress, it is expected that, immediately after completion of the Merger, former SunLink shareholders will own approximately 43% of the outstanding our common stock. Many former SunLink shareholders may decide not to hold the shares of our common stock and Regional Series D Preferred Stock they will receive in the Merger. Such sales of our common stock and Regional Series D Preferred Stock could have the effect of depressing the market price for such shares, and may take place promptly following the Merger.

The Merger will dilute the ownership position of our shareholders and result in SunLink shareholders having an ownership stake in the combined company. Based on the number of shares of our common stock and SunLink common stock outstanding as of March 10, 2025, upon completion of the Merger, our current shareholders are expected to own approximately 57% of our outstanding common stock and former SunLink are expected to own approximately 43% of our outstanding common stock. If the combined company is unable to fully and timely realize the strategic and financial benefits currently anticipated from the Merger, our shareholders will have experienced substantial dilution of their ownership interests without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined company is able to realize only part of the strategic and financial benefits currently anticipated from the Merger.

The market prices of our capital stock may decline as a result of the Merger if, among other things, the costs of the Merger are greater than expected, we do not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by financial or industry analysts or the effect of the Merger on our financial position, results of operations or cash flows is not consistent with the expectations of financial or industry analysts. Any of these events may make it more difficult for us to sell equity or equity-related securities and have an adverse impact on the prices of our capital stock.

Our Series A Preferred Stock ranks junior to our Series B Preferred Stock with respect to dividends and amounts payable in the event of our liquidation, dissolution or winding-up. This means that, in the event of our voluntary or involuntary liquidation, dissolution or winding-up, no distribution of our assets may be made to holders of our Series A Preferred Stock until we have paid to holders of our Series B Preferred Stock the applicable liquidation preference plus all accumulated accrued and unpaid dividends. Our common stock ranks junior to our Series A Preferred Stock with respect to the payment of dividends and amounts payable in the event of our liquidation, dissolution or winding-up. As discussed above, our Series A Preferred Stock is junior to our Series B Preferred Stock with respect to the payment of dividends and as to distribution of assets upon our liquidation, dissolution or winding-up. This means that, in the event of our voluntary or involuntary liquidation, dissolution or winding-up, no distribution of our assets may be made to holders of our common stock until we have paid to holders of our Series A Preferred Stock the applicable liquidation preference. As a result, the value of your investment in our Series A Preferred Stock or common stock may suffer if sufficient funds are not available to first satisfy our obligations to the holders of our Series B Preferred Stock or Series A Preferred Stock, respectively, in the event of our liquidation.

We periodically, but not less than annually, evaluate our real estate investments and other assets for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions, operator performance and legal structure. If we determine that a significant impairment has occurred, then we are required to make an adjustment to the net carrying value of the asset, which could have a material adverse effect on our results of operations in the period in which the write-off occurs.

Real estate investments are relatively illiquid and generally cannot be sold quickly. In addition, all of our owned healthcare properties serve as collateral for our secured debt obligations and may not be readily sold. Additional factors that are specific to our industry also tend to limit our ability to vary our portfolio promptly in response to changes in economic or other conditions. For example, all of our healthcare properties are "special purpose" properties that cannot be readily converted into general residential, retail or office use. In addition, transfers of operations of SNFs, ALF's and other healthcare facilities are subject to regulatory approvals not required for transfers of other types of commercial operations and other types of real estate. Thus, if the operation of any of our healthcare properties becomes unprofitable due to competition, age of improvements or other factors such that a tenant becomes unable to meet its obligations to us, then the liquidation value of the property may be substantially less, particularly relative to the amount owed on any related mortgage loan, than would be the case if the property were readily adaptable to other uses. Furthermore, the receipt of liquidation proceeds or the replacement of a tenant who has defaulted on its lease could be delayed by the approval process of any federal, state or local agency necessary for the transfer of the property or the replacement of the tenant with a new tenant licensed to manage the facility. In addition, certain significant expenditures associated with real estate investment, such as real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investment. Should such events occur, our revenues would be adversely affected.

As of December 31, 2024, we had approximately $49.7 million in indebtedness, including current maturities of debt. We may also obtain additional short-term and long-term debt to meet future capital needs, subject to certain restrictions under our existing indebtedness, which would increase our total debt. Our substantial amount of debt could have negative consequences to our business. For example, it could: - increase our vulnerability to general adverse economic and industry conditions or a downturn in our business;- require us to dedicate a substantial portion of cash flows from operations to interest and principal payments on outstanding debt, thereby limiting the availability of cash flow for dividends and other general corporate purposes;- require us to maintain certain debt coverage and other financial ratios at specified levels, thereby reducing our financial flexibility;- make it more difficult for us to satisfy our financial obligations;- expose us to increases in interest rates for our variable rate debt;- limit our ability to borrow additional funds on favorable terms, or at all, for working capital, debt service requirements, expansion of our business or other general corporate purposes;- limit our ability to refinance all or a portion of our indebtedness on or before maturity on the same or more favorable terms, or at all;- limit our flexibility in planning for, or reacting to, changes in our business and our industry;- limit our ability to make acquisitions or take advantage of business opportunities as they arise;- place us at a competitive disadvantage compared with our competitors that have less debt; and - limit our ability to borrow additional funds, even when necessary to maintain adequate liquidity. In addition, our ability to borrow funds in the future will depend in part on the satisfaction of the covenants in our debt agreements. If we are unable to satisfy the financial covenants contained in those agreements or are unable to generate cash sufficient to make required debt payments, the lenders and other parties to those arrangements could accelerate the maturity of some or all of our outstanding indebtedness.

For the year ended and as of December 31, 2024, we had a net loss of 3.2 million. At December 31, 2024, we had $0.6 million in cash, $2.9 million of restricted cash and $49.7 million in indebtedness net of $1.0 million deferred financing and unamortized discounts, of which the Company anticipates net principal repayments of approximately $7.0 million during the next twelve-month period. Management anticipates access to, and receipt of, several sources of liquidity, including cash from operations and cash on hand. We have routine ongoing discussions with existing and potential new lenders to refinance current debt on a longer-term basis and, in recent periods, have refinanced short-term acquisition-related debt with traditional long-term mortgage notes, some of which have been executed under government guaranteed lending programs. In order to satisfy the Company's capital needs, the Company is undertaking measures to grow its operations, streamline its cost infrastructure and otherwise increase liquidity by: (i) refinancing or repaying debt to reduce interest costs and mandatory principal repayments, with such repayment to be funded through potentially expanding borrowing arrangements with certain lenders; (ii) increasing future lease revenue through acquisitions and investments in existing properties; (iii) modifying the terms of existing leases; (iv) replacing certain tenants who default on their lease payment terms; and (v) reducing other and general and administrative expenses. The Company anticipates that these actions, if successful, will provide the opportunity to maintain its liquidity, thereby permitting the Company to better meet its operating and financing obligations. However, there is no guarantee that such actions will be successful.

We rely on external sources of capital, including, from time to time, private or public offerings of debt or equity, the assumption of secured indebtedness, or mortgage financing on a portion of our owned portfolio. If we are unable to obtain needed capital at all or only on unfavorable terms from these sources, then we might not be able to make the investments needed to grow our business or to meet our obligations and commitments as they mature. Our access to capital depends upon a number of factors over which we have little or no control, including: (i) the performance of the national and global economies generally; (ii) competition in the healthcare industry; (iii) issues facing the healthcare industry, including regulations and government reimbursement policies; (iv) our tenants' operating costs; (v) the market's perception of our growth potential; (vi) the market value of our properties; (vii) our current and potential future earnings and cash dividends on our common stock and preferred stock, if any; and (viii) the market price of the shares of our capital stock. We may not be in a position to take advantage of future investment opportunities if we are unable to access capital markets on a timely basis or are only able to obtain financing on unfavorable terms. In particular, we are subject to risks associated with debt financing, which could negatively impact our business and limit our ability to pay dividends to our shareholders and to repay maturing indebtedness. If we are unable to refinance or extend principal payments due at maturity or pay them with proceeds from other capital transactions, our cash flow may not be sufficient to repay our maturing indebtedness. Furthermore, if we have to pay higher interest rates in connection with a refinancing, the interest expenses relating to that refinanced indebtedness would increase, which could reduce our profitability. Moreover, additional debt financing increases our leverage. The degree of leverage could have important consequences to our shareholders, including affecting our ability to obtain additional financing in the future, and making us more vulnerable to a downturn in our results of operations or the economy in general.

As with other publicly-traded companies, the availability of equity capital depends, in part, on the market price of our capital stock, which, in turn, depend upon various market conditions and other factors, some of which we cannot control, that may change from time to time, and could negatively impact the market price of our stock, including: - the extent of investor interest;- our financial performance and that of our tenants;- general stock and bond market conditions; and - other factors such as governmental regulatory action. Our failure to meet the market's expectation with regard to future earnings and cash distributions would likely adversely affect the market price of our capital stock and, as a result, the availability of equity capital to us.

The terms of our credit agreements and other agreements evidencing our indebtedness require us to comply with a number of financial and other covenants which may limit management's discretion by restricting our ability to, among other things, incur additional debt, and create liens. Any additional financing we may obtain could contain similar or more restrictive covenants. Our continued ability to incur indebtedness and conduct our operations is subject to compliance with these financial and other covenants. Breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness in addition to any other indebtedness cross-defaulted against such instruments. Any such breach could materially adversely affect our business, results of operations and financial condition.

The failure of a bank, or events involving limited liquidity, defaults, non-performance, or other adverse conditions in the financial or credit markets impacting financial institutions, or concerns or rumors about such events, may adversely impact us, either directly or through an adverse impact on our tenants, operators, and borrowers. A bank failure or other event affecting financial institutions could lead to disruptions in our or our tenants', operators', and borrowers' access to bank deposits or borrowing capacity, including access to letters of credit from certain of our tenants relating to lease obligations. In addition, in the event of a bank failure or liquidity crisis, our or our tenants', operators', and borrowers' deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") deposit insurance coverage limits may not be backstopped by the U.S. government, and banks or financial institutions with which we or our tenants, operators, and borrowers do business may be unable to obtain needed liquidity from other banks, government institutions, or by acquisition. Any adverse effects to our tenants', operators', or borrowers' liquidity or financial performance could affect their ability to meet their financial and other contractual obligations to us, which could have a material adverse effect our business, results of operations, and financial condition.

Our management may be required to divert a disproportionate amount of attention away from their respective day-to-day activities and operations, and devote time and effort to consummating the Merger. The risks, and adverse effects, of such disruptions and diversions could be exacerbated by a delay in the completion of the Merger. These factors could adversely affect our financial position or results of operations, regardless of whether the Merger is completed.

We will incur substantial expenses in connection with and as a result of completing the Merger, including advisory, legal and other transaction costs, and, following the completion of the Merger, we expect to incur additional expenses in connection with combining the companies. A majority of these costs have already been incurred or will be incurred regardless of whether the Merger is completed. Factors beyond our control could affect the total amount or timing of these expenses, many of which, by their nature, are difficult to estimate accurately. Our management continues to assess the magnitude of these costs, and additional unanticipated costs may be incurred in connection with the Merger. Although we expect that the realization of benefits related to the Merger will offset such costs and expenses over time, no assurances can be made that this net benefit will be achieved in the near term, or at all.

The Merger Agreement contains provisions that make it more difficult for us to engage in any alternative transaction with a third party. The Merger Agreement contains certain provisions that restrict our ability to, among other things, solicit or knowingly induce (including by providing any material non-public information concerning such party or any significant subsidiary to any person or group for the purpose of facilitating any proposals or offers relating to any Regional acquisition proposal) or knowingly assist any proposal or offer that constitutes or would reasonably be expected to lead to a Regional acquisition proposal or engage in any negotiations with respect thereto. In some circumstances, upon termination of the Merger Agreement, we would be required to reimburse the other for all reasonable out-of-pocket fees and expenses incurred or paid by SunLink in connection with the negotiation of the Merger Agreement and the consummation of any of the transactions contemplated by the Merger Agreement in an amount not to exceed $250,000. These provisions could discourage a potential third-party acquiror or merger partner that might have an interest in acquiring all or a significant portion of Regional or pursuing an alternative company transaction from considering or proposing such a transaction, even if it were prepared to pay consideration with a higher per share value than the value proposed to be received in the Merger or would result in greater value to Regional's shareholders relative to the terms and conditions of the Merger Agreement. In particular, the reimbursement fee, if applicable, could result in a potential third-party acquiror or merger partner proposing to pay a lower price to the Regional shareholders than it might otherwise have proposed to pay absent such a fee.

In connection with the transactions contemplated by the Merger Agreement, on January 3, 2025, we entered into a support and lock-up agreement with SunLink and our directors and officers and a support and lock-up agreement with SunLink and certain directors and officers SunLink. The existence of the support and lock-up agreements could discourage a third party from pursuing an alternative transaction involving us.

The completion of the Merger is subject to a number of conditions, including, among other things, (i) the receipt of the required approvals from the shareholders of Regional, (ii) the receipt of the required approvals from the shareholders of SunLink, (ii) the absence of any governmental order or law making illegal or otherwise prohibiting the consummation of the Merger or imposing, individually or in the aggregate, a burdensome condition, (iv) the effectiveness of the Registration Statement on Form S-4 (the "Registration Statement") to be filed by Regional, and (v) the authorization for trading of the shares of our common stock and Regional Series D Preferred Stock ("Regional Series D Preferred Stock") to be issued in connection with the Merger on the over-the-counter stock markets or NYSE American. The failure to satisfy all of the required conditions could delay the completion of the Merger for a significant period of time or prevent completion from occurring at all. Any delay in completing the Merger could cause Regional not to realize some or all of the benefits, or realize them on a different timeline than expected, that Regional expects to achieve if the Merger is successfully completed within the expected timeframe. There can be no assurance that the conditions in the Merger Agreement will be satisfied or (to the extent permitted) waived or that the Merger will be completed. In addition, subject to limited exceptions, either Regional or SunLink may terminate the Merger Agreement if the Merger has not been consummated by 5:00 p.m., Eastern time, on March 31, 2025. Failure to complete the Merger could negatively impact our future business and financial results, and we could be subject to a number of risks, including the following: - the market price of our capital stock could decline;- we could owe a reimbursement fee to SunLink the other under certain circumstances;- if the Merger Agreement is terminated and we seek another business combination, we may not find a party willing to enter into a transaction on terms comparable to or more attractive than the terms agreed to in the Merger Agreement;- time and resources, financial and other, we have committed to matters relating to the Merger could otherwise have been devoted to pursuing other beneficial opportunities;- we may experience negative reactions from the financial markets or from our customers, suppliers, regulators or employees;- we will be required to pay our costs relating to the Merger, such as legal, accounting, financial advisory, filing, printing and mailing fees, whether or not the Merger is completed, subject to the reimbursement fee;- we are subject to restrictions on the conduct of our business prior to the effective time, as set forth in the Merger Agreement, which may prevent us from making certain acquisitions or taking other actions during the pendency of the Merger; and - reputational harm due to the adverse perception of any failure to successfully complete the Merger. In addition, if the Merger is not completed, we could be subject to litigation related to any failure to complete the Merger or related to any enforcement proceeding commenced against us to perform ours obligations under the Merger Agreement. Any of these risks could materially and adversely impact our financial condition, financial results and stock price.

While the Company is a self-managed real estate investment company that invests primarily in real estate purposed for long-term care and senior living, when business conditions require, the Company may undertake portfolio stabilization measures in order to preserve the value of our assets. This portfolio stabilization measure exposes the Company directly to all the risks our tenants face as discussed in this "Risk Factor -Risk Related to our Business and Industry" section.