UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission
File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
(Address of principal executive offices & zip code)
(Registrant’s telephone number including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ or
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| OTCQX |
We had shares of our common stock outstanding as of the close of business on August 30, 2023.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995 for these forward-looking statements. Our forward-looking statements relate to future events or our future performance and include, but are not limited to, statements concerning our business strategy, future commercial revenues, market growth, capital requirements, new product introductions, expansion plans and the adequacy of our funding. Other statements contained in this Report that are not historical facts are also forward-looking statements. We have tried, wherever possible, to identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and other comparable terminology.
We caution investors that any forward-looking statements presented in this Report, or that we may make orally or in writing from time to time, are based on the beliefs of, assumptions made by, and information currently available to, us. Such statements are based on assumptions and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations, and those differences may be material. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include the following:
| ● | Our limited cash and a history of losses; | |
| ● | Our ability to finance our innovative care products and services, including our Longevity-tech platform and products and services that are in development; | |
| ● | The impact of any financing activity on the level of our stock price; | |
| ● | The impact of any default by us of certain indebtedness and the exercise by the lenders of their respective remedies including the right to convert stock and exercise warrants at a price that is a discount to our trading price; | |
| ● | The additional dilutive impact of any issuances of securities to raise capital, including any capital in anticipation and in advance of the previously reported merger (the “Viveon Merger”) of us with Viveon Health Acquisition Corp.; | |
| ● | The timing and amount of financing acquired in connection with the Viveon Merger; | |
| ● | The cost and uncertainty from compliance with environmental regulations and the regulations related to operating our memory care facilities and adult day care centers; | |
| ● | The effect of pandemics and other public health related issues on our businesses, including actions or additional regulations by State and Federal governments; | |
| ● | Local, regional, national and international economic conditions and events, and the impact they may have on us and our customers; | |
| ● | The impact of inflation to our businesses, including increases in our labor costs and other costs we pay for goods and services; | |
| ● | The impact of a shortage of workers in our industries and our ability to maintain costs while properly staffing our facilities; | |
| ● | The availability of state funds through civil money penalty grant programs; | |
| ● | Increases in tort and insurance liability costs; | |
| ● | Delays or nonpayment to us, including payments related to government or agency reimbursements; | |
| ● | Our ability to pay our liabilities, including tax obligations and the exercise of remedies by holders of our indebtedness; and | |
| ● | Circumstances that adversely affect the ability of older adults or their families to pay for our services, such as economic downturns, weakening investment returns, higher levels of unemployment among our residents or potential residents’ family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics. |
For further discussion of these and other factors see “Risk Factors” in our Annual Report on Form 10-K, as amended and supplemented.
This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report.
| I |
Clearday, Inc.
June 30, 2023
FORM 10-Q
Table of Contents
References in this Report to the “Clearday”, “Company”, “we”, “us” include Clearday, Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context indicates otherwise.
The mark “Clearday” is protected under applicable intellectual property laws. Solely for convenience, trademarks of Clearday referred to in this Report may appear without the TM symbol, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and related intellectual property rights.
| II |
Clearday, Inc.
Condensed Consolidated Balance Sheets
June 30, 2023 and December 31, 2022
(Unaudited)
| June 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Real estate property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Derivative liabilities | ||||||||
| Accrued interest | ||||||||
| Related Party Payables | ||||||||
| Deferred revenue | ||||||||
| Current portion long-term debt | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Long-term debt, less current portion, net | ||||||||
| Total liabilities | ||||||||
| Mezzanine equity | ||||||||
| Series F | ||||||||
| Deficit: | ||||||||
Preferred Stock, $ par value, shares authorized | ||||||||
Series A Convertible Preferred Stock, $ par value, shares authorized, shares issued and outstanding, as of both June 30, 2023 and December 31, 2022. Liquidation value of $ | ||||||||
| Common Stock, $ par value, shares authorized, and shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Clearday, Inc. stockholders’ deficit | ( | ) | ( | ) | ||||
| Non-controlling interest in subsidiaries | ||||||||
| Clearday Inc. stockholder’s total deficit | ( | ) | ( | ) | ||||
| TOTAL LIABLITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ DEFICIT | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 1 |
Clearday, Inc.
Condensed Consolidated Statements Of Operations
For The Three and Six Months Ended June 30, 2023 and 2022
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| REVENUES | ||||||||||||||||
| Resident fee revenue, net | $ | $ | $ | $ | ||||||||||||
| Adult day care | ||||||||||||||||
| Commercial property rental revenue | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Wages & general operating expenses | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (income) expenses | ||||||||||||||||
| Interest expense | ||||||||||||||||
| PPP loan forgiveness | ( | ) | ( | ) | ||||||||||||
| Derivative financing costs | ||||||||||||||||
| Fair value of derivative | ( | ) | ||||||||||||||
| Extinguishment of debt | ||||||||||||||||
| (Gain)/loss on disposal of asset | ( | ) | ||||||||||||||
| Loss on impairment | ||||||||||||||||
| (Gain)/loss on termination of lease | ( | ) | ||||||||||||||
| Other (income)/expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other (income)/expenses, net | ( | ) | ( | ) | ||||||||||||
| Net loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from discontinued operations, net of tax | ( | ) | ( | ) | ||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to non-controlling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Preferred stock dividend | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to Clearday, Inc. common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted loss per share attributable to Clearday, Inc. | ||||||||||||||||
| Net loss from continued operations | ) | ) | ) | ) | ||||||||||||
| Net loss from discontinued operations | ) | |||||||||||||||
| Net loss | ) | ) | ) | ) | ||||||||||||
| Weighted average common shares basic and diluted outstanding | ||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 2 |
Clearday, Inc.
Consolidated Statements of Mezzanine Equity, Convertible Preferred Stock and Stockholders’ Deficit
Six Months Ended June 30,
| Mezzanine Equity Series F Preferred Stock | Preferred Stock Series A | Common Stock | Additional Paid- in | Accumulated | Clearday, Inc. Stockholders’ | Non-Controlling | Total | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ($ | ) | |||||||||||||||||||||||||||||||
| PIK dividends accruals on convertible Preferred Stock F | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Series F Preferred F Stock converted to common Stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Accrued of series I convertible Preferred Stock in subsidiary | - | |||||||||||||||||||||||||||||||||||||||||||
| Series I adjustment | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Shares issued for Loan | - | |||||||||||||||||||||||||||||||||||||||||||
| Dissolution of Longhorn Hospitality | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 3 |
| Mezzanine Equity Series F Preferred Stock | Preferred Stock Series A | Common Stock | Additional Paid- in | Accumulated | Clearday, Inc. Stockholders’ | Non-Controlling | Total | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||
| PIK dividends accruals on convertible Preferred Stock F | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Series F Preferred F Stock converted to common Stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Accrued of series I convertible Preferred Stock in subsidiary | ||||||||||||||||||||||||||||||||||||||||||||
| Debt discount from derivative settlements | ||||||||||||||||||||||||||||||||||||||||||||
| Stock Compensation for services | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for Loan | ||||||||||||||||||||||||||||||||||||||||||||
| Stock issued for extinguishment of debt | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 4 |
Clearday, Inc.
Condensed Consolidated Statements Of Cash Flows
For The Six Months Ended June 30, 2023 and 2022
(Unaudited)
| June 30, 2023 | June 30, 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Loss from discontinued operations, net of tax | ( | ) | ||||||
| Loss from continued operations | ( | ) | ( | ) | ||||
| Adjustments required to reconcile net loss to cash flows used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of right of use assets | ||||||||
| Shares issued for loan commitment | ||||||||
| Shares issued for services | ||||||||
| Financing costs from derivative liabilities | ||||||||
| Gain on termination of lease | ( | ) | ||||||
| Series I preferred stock accumulated dividend | ||||||||
| Change in fair value of the derivatives | ( | ) | ||||||
| Amortization of debt discount related to derivatives | ||||||||
| Amortization of debt issuance costs | ||||||||
| Loss on extinguishment of debt | ||||||||
| Loss on sale of fixed assets | ||||||||
| Bad debt expense | ||||||||
| Gain on PPP loan forgiveness | ( | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Other current assets | ||||||||
| Prepaid expenses | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued liabilities | ||||||||
| Deferred revenue | ( | ) | ||||||
| Related party payables | ||||||||
| Other non-current assets | ||||||||
| Other liabilities | ( | ) | ( | ) | ||||
| Change in operating lease liability | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of property and equipment | ||||||||
| Payments for property and equipment | ( | ) | ||||||
| Net cash provided by (used in) investing activities of the continuing operations | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payment of long-term debt and notes payable | ( | ) | ( | ) | ||||
| Borrowings on debt | ||||||||
| Net cash provided by in financing activities | ||||||||
| Change in cash and restricted cash from continuing operations | ( | ) | ( | ) | ||||
| Change in cash and restricted cash from discontinued operations | ( | ) | ||||||
| Cash and restricted cash at beginning of the period | ||||||||
| Cash and restricted cash at end of period | $ | $ | ( | ) | ||||
| Reconciliation of cash and restricted cash consist of the following: | ||||||||
| End of period | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| Total cash and restricted cash | $ | $ | ||||||
| Beginning of period | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| Total cash and restricted cash | $ | $ | ||||||
| Supplemental disclosures of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | ||||||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| Early lease termination fee | $ | $ | ||||||
| Series F incentive shares converted to common stock | ||||||||
| Indebtedness used to pay off rent expense | ||||||||
| Accounts payable exchanged for common shares | ||||||||
| Settlements on derivative liability | ||||||||
| PIK dividends for Series F Preferred Stock | ||||||||
| Debt discount on derivative liability | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 5 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Going Concern
Organization, Description of Business
Clearday, Inc., a Delaware corporation (the “Company”), formerly known as Superconductor Technologies Inc. (“STI”), was established in 1987 and closed a merger (the “AIU Merger”) with Allied Integral United, Inc., a Delaware corporation (“AIU”), on September 9, 2021. The Company continued the businesses of AIU and continued one of the businesses of STI. AIU was incorporated on December 20, 2017, and began its business on December 31, 2018 when it acquired memory care residential facilities and other businesses (the “2018 Acquisition”) that was conducted since November 2010. Since the 2018 Acquisition, the Company has been developing innovative care and wellness products and services focusing on the longevity market, including its Longevity-tech platform. In the first quarter of 2023, the Company disposed of three of its four full time memory care communities to focus on its digital care services, including robotics and its Longevity-tech platform. During the second quarter of 2023, the Company operated one residential care facility and one adult daycare facility and marketed its digital care services to third parties.
Going Concern
As
of June 30, 2023, we have an accumulated deficit of $
2. Summary of Significant Accounting Policies
The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the interim reporting rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments (unless otherwise indicated), necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
Principles of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of the Company, including its wholly owned
subsidiaries and AIU Alternative Care, Inc., a Delaware corporation (“AIU Alt Care”) and Clearday Alternative Care Oz
Fund, L.P, a Delaware limited partnership (“Clearday OZ Fund”). The Company owns all of the voting interests of AIU Alt
Care and the sole general partner of Clearday OZ Fund, and less than
The
certificate of incorporation of AIU Alt Care authorizes shares of preferred stock designated as its Series I
AIU
Alt Care formed AIU Impact Management, LLC, which is the sole general partner and manager of Clearday OZ Fund. Clearday OZ Fund allocates
| 6 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Each
of the Alt Care Preferred Stock and the limited partnership interests in Clearday OZ Fund (“Clearday OZ LP Interests”) may
be exchanged by the holder of such securities into shares of Clearday common stock. The exchange rate for each of the Alt Care Preferred
Stock and the Clearday OZ LP Interests are equal to (i)
The Company reports its non-controlling interest in subsidiaries as a separate component of equity in the condensed consolidated balance sheets and reports both net loss attributable to the non-controlling interest and net loss attributable to the Company’s common stockholders on the face of the condensed consolidated statement of operations.
Basis of Presentation
The Company’s condensed consolidated financial statements have been prepared in conformity with GAAP. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Classification of Convertible Preferred Stock
The
Company applied ASC 480, “Distinguishing Liabilities from Equity”, and revised the condensed consolidated presentation
of its convertible preferred stock whose redemption is outside the control of the issuer.
Use of Estimates
The Company’s condensed consolidated financial statement preparation requires that management make estimates and assumptions which affect the reporting of assets and liabilities and the related disclosure of contingent assets and liabilities in order to report these condensed consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, the Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business as two operating segments, the Longevity-tech Platform and personal care.
Cash, and Restricted Cash
Cash, consisting of short-term, highly liquid investments and money market funds with original maturities of three months or less at the date of purchase, are carried at cost plus accrued interest, which approximates market value.
Restricted cash includes cash that the Company deposited as security for obligations arising from property taxes, property insurance and replacement reserve the Company is required to establish escrows as required by its mortgages and certain resident security deposits.
Accounts Receivable
The Company records accounts receivable at their estimated net realizable value. Additionally, the Company estimates allowances for uncollectible amounts based upon factors which include, but are not limited to, historical payment trends, write-off experience, and the age of the receivable as well as a review of specific accounts, the terms of the agreements, the residents, the payers’ financial capacity to pay and other factors which may include likelihood and cost of litigation.
| 7 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Real Estate Property and Equipment, Net
Property and equipment are stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to operations as incurred. Depreciation and amortization are based on the straight-line method over the estimated useful lives of the related assets. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts, and any resulting gain or loss is reflected in operations in the period realized.
Depreciation is computed on the straight-line method with useful lives as follows:
| Asset Class | Estimated
Useful Life | |||
| Buildings and building improvements | ||||
| Leasehold improvements | ||||
| Furniture and fixtures and equipment | ||||
| Computer equipment and software | ||||
Intangible Assets, Net
Software Capitalization
With
regards to developing software, any application costs incurred during the development stage, both internal expenses and those paid
to third parties are capitalized and amortized per FASB Topic ASC350-40 (“Internal-Use Software Accounting &
Capitalization”). Once the software has been developed, the costs to maintain and train
others for its use will be expensed. With regards to developing software, any application costs incurred during the development
state, both internal expenses and those paid to third parties are capitalized and amortized based on the estimated useful life of
Impairment Assessment
The Company evaluates intangible assets and other long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This includes but is not limited to significant adverse changes in business climate, market conditions or other events that indicate an assets’ carrying amount may not be recoverable. Recoverability of these assets is measured by comparing the carrying amount of each asset to the future cash flows the asset is expected to generate. If the cash flows used in the test for recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value.
Revenue Recognition
The Company recognizes revenue from contracts with customers in accordance with ASC Topic 606, “Revenue from Contracts with Customers”, or ASC Topic 606, using the practical expedient in paragraph 606-10-10-4 that allows for the use of a portfolio approach, because we have determined that the effect of applying the guidance to our portfolios of contracts within the scope of ASC Topic 606 on our condensed consolidated financial statements would not differ materially from applying the guidance to each individual contract within the respective portfolio or our performance obligations within such portfolio. The five-step model defined by ASC Topic 606 requires the Company to: (i) identify its contracts with customers, (ii) identify its performance obligations under those contracts, (iii) determine the transaction prices of those contracts, (iv) allocate the transaction prices to its performance obligations in those contracts and (v) recognize revenue when each performance obligation under those contracts is satisfied. Revenue is recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services.
| 8 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A substantial portion of the Company’s revenue from its independent living and assisted living communities relates to contracts with residents for services that are generally under ASC Topic 606. The Company’s contracts with residents and other customers that are within the scope of ASC Topic 606 are generally short-term in nature. The Company has determined that services performed under those contracts are considered one performance obligation in accordance with ASC Topic 606 as such services are regarded as a series of distinct events with the same timing and pattern of transfer to the resident or customer. Revenue is recognized for those contracts when the Company’s performance obligation is satisfied by transferring control of the service provided to the resident or customer, which is generally when the services are provided over time.
Resident fees at our residential communities consist of regular monthly charges for basic housing and support services and fees for additional requested services, such as assisted living services, personalized health services and ancillary services. Fees are specified in our agreements with residents, which are generally short term (30 days to one year), with regular monthly charges billed in advance. Funds received from residents in advance of services provided are not material to our condensed consolidated financial statements. Our senior living communities require payment of an upfront entrance fee in advance of a resident moving into the community; substantially all these community fees are non-refundable and are initially recorded as deferred revenue in our condensed consolidated balance sheets. These deferred amounts are then amortized on a straight-line basis into revenue over the term of the resident’s agreement. When the resident no longer resides within our community, the remaining deferred non-refundable fees are recognized in revenue. Revenue recorded and deferred in connection with community fees is not material to our condensed consolidated. Revenue for basic housing and support services and additional requested services is recognized in accordance with ASC Topic 606 and measured based on the consideration specified in the resident agreement and is recorded when the services are provided.
Resident Care Contracts
Resident fees at the Company’s senior living communities may consist of regular monthly charges for basic housing and support services and fees for additional requested services and ancillary services. Fees are specified in the Company’s agreements with residents, which are generally short term (30 days to one year), with regular monthly charges billed on the first of the month. Funds received from residents in advance of services are not material to the Company’s condensed consolidated financial statements.
Below is a table that shows the breakdown by percentage of revenues related to contracts with residents versus resident fees for support or ancillary services.
| For the three-month period ended June 30, | ||||||||||||||||
| 2023 | % | 2022 | % | |||||||||||||
| Revenue from contracts with customers: | ||||||||||||||||
| Resident rent - over time | $ | % | $ | % | ||||||||||||
| Day care – point in time | % | % | ||||||||||||||
| Amenities and conveniences - point in time | % | % | ||||||||||||||
| Total revenue from contracts with customers | $ | % | $ | % | ||||||||||||
| For the six month periods ended June 30, | ||||||||||||||||
| 2023 | % | 2022 | % | |||||||||||||
| Revenue from contracts with customers: | ||||||||||||||||
| Resident rent - over time | $ | % | % | |||||||||||||
| Day care | % | % | ||||||||||||||
| Amenities and conveniences - point in time | % | % | ||||||||||||||
| Total revenue from contracts with customers | $ | % | $ | % | ||||||||||||
Financial Instruments
In accordance with the reporting requirements of the FASB ASC Topic 825, “Financial Instruments”, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this standard and includes this additional information in the notes to the consolidated financial statements when the fair value is different than the carrying value of those financial instruments. The Company does not have assets or liabilities measured at fair value on a recurring basis except its derivative liability.
| 9 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at the balance sheet dates, nor gains or losses reported in the statements of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held during the periods presented, except as disclosed.
Fair Value Measurement
ASC Topic 820, “Fair Value Measurements”, provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange.
Level 2 - Pricing inputs are other than quoted prices in active markets but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using highly observable inputs.
Level 3 - Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value.
The following tables present the Company’s assets and liabilities that were measured and recognized at fair value as of June 30, 2023 and December 31, 2022:
| June 30, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Derivative liability | ||||||||||||||||
| December 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Derivative liability | ||||||||||||||||
Under the Company’s contract ordering policy, the Company first considers common shares issued and outstanding as well as reserved but unissued equity awards, such as under an equity award program. All remaining equity linked instruments such as, but not limited to, options, warrants, and debt and equity with conversion features are evaluated based on the date of issuance. If the number of shares which may be issued under the Company’s agreements exceed the authorized number of shares or are unable to be determined, equity linked instruments from that date forward are considered to be derivative liabilities until such time as the number of shares which may be issued under the Company’s agreements no longer exceed the authorized number of shares and are able to be determined.
The Company has outstanding note agreements containing provisions meeting the definition of derivative liability which therefore require bifurcation. Further, pursuant to the Company’s contract ordering policy, any issuance of equity linked instruments subsequent to the initial triggering agreement will result in derivative liabilities.
At June 30, 2023, the Company estimated the fair value of the conversion feature derivatives embedded in the notes payable and warrants based on assumptions used in the Cox-Ross-Rubinstein binomial pricing model using the following inputs: the price of the Company’s common stock of $; risk-free interest rates ranging from % to %; expected volatility of the Company’s common stock ranging from % to %; estimated exercise prices ranging from $ to $; and terms from one to sixty months.
At December 31, 2022, the Company estimated the fair value of the conversion feature derivatives embedded in the notes payable and warrants based on assumptions used in the Cox-Ross-Rubinstein binomial pricing model using the following inputs: the price of the Company’s common stock of $; risk-free interest rates ranging from % to %; expected volatility of the Company’s common stock ranging from % to %; estimated exercise prices ranging from $ to $; and terms from three to sixty months.
| 10 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the changes in the Company’s Level 3 derivative liability at fair value is as follows:
| Balance - December 31, 2022 | $ | |||
| Additions | ||||
| Settlements | ( | ) | ||
| Change in fair value | ( | ) | ||
| Balance - June 30, 2023 | $ |
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC Topic 815, “Derivatives and Hedging Activities”.
Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The Company records when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.
Research and Development Costs
Research and development costs are charged to expense as incurred and are included in operating expenses. There were no research and development costs incurred in the three or six months ended June 30, 2023 or 2022.
Advertising Costs
The costs of advertising are expensed as incurred. Advertising expenses are included in the Company’s operating expenses. There were no advertising expenses in the three or six months ended June 30, 2023 or 2022.
Lease Accounting
The Company follows ASC Topic 842, “Leases”. The Company has elected the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. All ROU assets were written off effective March 31, 2023, when the Company disposed of the three leased properties described in Note 5 — Leases.
Income Taxes
The Company’s income tax expense includes U.S. income taxes. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences to be included in the Company’s condensed consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse, while the effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
| 11 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Company can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained
upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with
a tax position is measured as the largest amount that has a
Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income, and, to the extent, the Company believes that the Company is more likely than not that all or a portion of deferred tax assets will not be realized, the Company establishes a valuation allowance to reduce the deferred tax assets to the appropriate valuation.
Company includes the related tax expense or tax benefit within the tax provision in the condensed consolidated statement of operations in that period. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In the future, if the Company determines that it would be able to realize its deferred tax assets in excess of their net recorded amount, the Company will make an adjustment to the deferred tax asset valuation allowance and record an income tax benefit within the tax provision in the condensed consolidated statement of operations in that period.
The Company pays franchise taxes in certain states in which it has operations. The Company has included franchise taxes in general and administrative and operating expenses in its condensed consolidated statements of operations.
FASB ASC Topic 260, “Earnings Per Share”, requires a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share (EPS) computations.
Basic earnings (loss) per share are computed by dividing income (loss) attributable to Clearday shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
Commitments and Contingencies
The Company has been, is currently, and expects in the future to be involved in claims, lawsuits, and regulatory and other government audits, investigations and proceedings arising in the ordinary course of the Company’s business, some of which may involve material amounts. The Company establishes accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Also, the defense and resolution of these claims, lawsuits, and regulatory and other government audits, investigations and proceedings may require the Company to incur significant expense. The Company accounts for claims and litigation losses in accordance with ASC Topic 450, “Contingencies”. Under ASC Topic 450, loss contingency provisions are recorded for probable and estimable losses at the Company’s best estimate of a loss or, when a best estimate cannot be made, at the Company’s estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment, and are refined as additional information becomes known. Accordingly, the Company is often initially unable to develop a best estimate of loss and therefore the estimated minimum loss amount, which could be zero, is recorded; then, as information becomes known, the minimum loss amount is updated, as appropriate. Occasionally, a minimum or best estimate amount may be increased or decreased when events result in a changed expectation.
Recently Issued Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470- 20)” and “Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (a) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, “Debt: Debt with Conversion and Other Options”, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (b) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (c) revises the guidance in ASC 260, “Earnings Per Share, to require entities to calculate diluted earnings per share for convertible instruments by using the “if-converted” method.” In addition, entities must presume share settlement for purposes of calculating diluted earnings per share when an instrument may be settled in cash or shares. For smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023. The Company is currently evaluating the impact that ASU 2020-06 may have on its condensed consolidated financial statements and related disclosures.
| 12 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2023, there were several new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.
3. Real Estate, Property and Equipment
The Company’s real estate, property and equipment consisted of the following at the respective balance sheet dates:
| June 30, 2023 | December 31, 2022 | |||||||
| Land | $ | $ | ||||||
| Building and building improvements | ||||||||
| Leasehold Improvements | ||||||||
| Computers | ||||||||
| Furniture, fixtures, and equipment | ||||||||
| Other Equipment | ||||||||
| Construction in progress | ||||||||
| Total | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Real estate, property and equipment, net | $ | $ | ||||||
The
Company recorded depreciation expenses relating to real estate, property, and equipment in the amount of $
4. Intangible Assets, Net
Software Capitalization.
At
June 30, 2023 and June 30, 2022, $
Developed intangible assets subject to amortization are as follows:
| June 30, 2023 | ||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted-Average Remaining Useful Life (Years) | |||||||||||||
| Developed technology | $ | $ | | |||||||||||||
The Company recorded amortization
expense related to its intangible assets in the amounts of $
Expected future amortization expense for intangible assets as of June 30, 2023, is as follows:
| Fiscal Years | ||||
| 2023 (remaining) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ |
| 13 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| December 31, 2022 | ||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted-Average Remaining Useful Life (Years) | |||||||||||||
| Developed technology | $ | $ | $ | |||||||||||||
5. Leases
Lease Terminations
On
March 31, 2023, the Company entered into agreements (collectively, the “Lease Transition Agreement”) to terminate the
leases (“Community Leases”) for three of its four residential care facilities, which account for all of Clearday’s
leased residential care facilities. The Community Leases related to residential communities (the “Communities”) located
in Westover, Texas, New Braunfels, Texas and Little Rock, Arkansas. Terminating the Community Leases removed right of use
liabilities and right of use assets related to these Community Leases, as of December 31, 2022 and the write-off or elimination of
the related net leasehold improvements and personal property in these Communities. We currently have no material economic
rights or obligations under the Community Leases other than for payment obligations under the Lease Transition Agreements. The
tenants of the Community Leases and the guarantors, including Clearday, Inc., entered a Lease Transition Agreement with the Lessor
of the properties dated March 31, 2023. The Lease Transition Agreement provided, among other matters, that the aggregate liability
of the Clearday subsidiaries that are tenants under the Community Leases are reduced to amount (the “Repayment Amount”)
that is equal to the sum of: (1) past due rent payments under the Community Leases of $
| 14 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In
connection with the Lease Transition Agreements, the tenants under the Community Leases and the Clearday, Inc. subsidiaries that operated
the Communities signed a promissory note for the Repayment Amount and the Past Due Community Lease Amounts and Clearday, Inc. agreed
to be an additional guarantor of the obligations of the Community Leases, as modified and limited by the Community Lease Transition Agreement,
which is less than approximately $
In connection with the proposed termination of the Community Leases, the subsidiaries that operate the Communities (the “Current Operators”) and subsidiaries of the New Operator (“New Communities Operators”) entered into the Operations Transfer Agreement dated as of April 1, 2023 (the “OTA”). The OTA provided that the New Communities Operators will purchase the personal property and other assets of the Current Operators used at the Communities to enable the New Communities Operators to conduct their business at the Communities under new leases or other arrangements with the Landlord. Such purchase and sale will close on the date that the New Communities Operators receive the licenses, authorizations and approvals from the applicable Texas and Arkansas governmental agencies to conduct a licensed residential memory care business at the Communities and they enter into new leases with the Landlord (the “Commencement Date”). The New Communities Operators entered into new agreements with the residents at the Communities, effective the Commencement Date and were responsible for any operating losses of the facilities from and after March 31, 2023. The Current Operators have provided notice to each of the residents at the Communities that their agreements with the Current Operators have been terminated, effective on the Commencement Date. The New Communities Operators are not affiliated with the Company or its officers or directors. The OTA and Interim Agreements provide for the asset purchase and sale of the memory care businesses at the Communities, and the transfer of certain agreements and the assumption of certain specified liabilities. The Current Operators, each of which is a subsidiary of Clearday, Inc., remain obligated for liabilities that are not assumed by the New Operators. The New Communities Operators have employed, or offered employment to, all of our employees at these communities and will fund and be responsible for any operating cash losses for the Communities.
6. Indebtedness
As
of June 30, 2023, and December 31, 2022, the current portion of long-term debt within the Company’s condensed consolidated
financial statements was $
During
the six months ended June 30, 2023 and 2022, we incurred interest expense totaling $
| 15 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Company’s debt as of June 30, 2023 and December 31, 2022:
| As of June 30, | Total | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total obligations | $ | |||
Indebtedness of Facilities
| Maturity Date | Interest Rate | June 30, 2023 | December 31, 2022 | |||||||||||
| Naples Equity Loan ^ | % | $ | $ | |||||||||||
| Gearhart Loan ^ | % | |||||||||||||
| SBA PPP Loans # | % | |||||||||||||
| Bank Direct Payable | % | |||||||||||||
| AIU Sixth Street | % | |||||||||||||
| 1800 Diagonal Lending | % | |||||||||||||
| 1800 Diagonal Lending | % | |||||||||||||
| Equity Secure Fund I, LLC* | % | |||||||||||||
| Invesque, Inc. | % | |||||||||||||
Merchant Cash Advance Loans (^^)
| Naples Operating PIRS Capital | % | $ | $ | |||||||||||
| Little Rock Libertas | % | |||||||||||||
| PIRS Capital Financing Agreement | % | |||||||||||||
| Naples Samson #1 | % | |||||||||||||
| Naples LG Funding #2 | % | |||||||||||||
| Little Rock Premium Funding | % | |||||||||||||
| Little Rock KIT Funding | % | |||||||||||||
| Little Rock Samson Funding #4 | % | |||||||||||||
| Naples Operating SWIFT | % | |||||||||||||
| New Braunfels Samson Cloud Fund | % | |||||||||||||
| New Braunfels Samson Group | % | |||||||||||||
| Westover Hills One River | % | |||||||||||||
| Westover Hills FOX Capitol | % | |||||||||||||
| Westover Hills Arsenal | % | |||||||||||||
| Westover Samson Funding | % | |||||||||||||
| Subtotal merchant cash advance loans | ||||||||||||||
| Notional amount of debt | ||||||||||||||
| Less: current maturities | ||||||||||||||
| $ | $ |
| 16 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Indebtedness Allocated to real estate
| Real Estate: | ||||||||||||||
| Artesia Note | Variable | $ | $ | |||||||||||
| Carpenter Enterprises | Variable | |||||||||||||
| Leander Stearns National Association | % | |||||||||||||
| Notional amount of debt | ||||||||||||||
| Less: current maturities | ||||||||||||||
| $ | $ |
Other (Corporate) Indebtedness
| AGP Contract ^ | % | $ | $ | |||||||||||
| Cibolo Creek Partners | % | |||||||||||||
| Cibolo Creek Partners promissory note | % | |||||||||||||
| EIDL SBA Treas 310 | % | |||||||||||||
| Firstfire | % | ( | ) | |||||||||||
| Five C’s Loan ^ | % | |||||||||||||
| GS Capital | % | |||||||||||||
| Jefferson Street Capital LLC @ | % | |||||||||||||
| KOBO, L.P. | Floating | % | ||||||||||||
| Mast Hill LP @ | % | |||||||||||||
| Mast Hill LP @ | % | |||||||||||||
| Round Rock Development Partners Note | % | |||||||||||||
| Jefferson Street Capital LLC (February 2023) | % | |||||||||||||
| Mast Hill LP (January 2023)@ | % | |||||||||||||
| Bridge Financings | - | |||||||||||||
| Convertible Notes Issued by AIU Alternative Care, Inc. | % | |||||||||||||
| Notional amount of debt | ||||||||||||||
| Less: current maturities | ||||||||||||||
| $ | $ | |||||||||||||
| TIC Purchase Agreements | No Specified Date | % | $ | $ | ||||||||||
| Total | ||||||||||||||
| Less Debt Discount & Derivatives | ( | ) | ( | ) | ||||||||||
| Total | $ | $ | ||||||||||||
| ^ | |
| ^^ | |
| # | |
| @ | |
| * |
| 17 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Equity Secure Fund I, LLC Modification
As of June 5, 2023, AIU 8800 Village Drive, LLC, the subsidiary of Clearday,
Inc. that owns the property in San Antonio, Texas used for our headquarters and production facilities, extended, modified and rearranged
the mortgage financing of such property, to extend the maturity to
Bridge Financings.
The Company has received
certain advances that are payable on demand and on October 6, 2023, issued Senior Convertible Notes (“Bridge Notes”) as payment
of such advances with interest accruing under Bridge Note as of the date of each such advance. The Company is continuing such offering
of Bridge Notes of an amount of up to $
7. Commitments and Contingencies
Contingencies
Simpsonville litigation
The
tenant, MCA Simpsonville Operating Company LLC, referred to as Tenant, of the MCA community that is located in Simpsonville, South Carolina,
referred to as the Simpsonville Facility, and other affiliates of the Company have a dispute with the landlord of the Simpsonville Facility,
MC-Simpsonville, SC-UT, LLC, referred to as the Landlord, and its affiliates (Embree Group of Companies: Embree Construction Group, Inc.,
Embree Asset Group, Inc., and Embree Capital Markets Group, Inc., referred to collectively as Embree) under the terms of the lease. After
non-payment, the Landlord instituted litigation (“Simpsonville Action 1”) that is captioned and numbered MC-Simpsonville,
SC-UT, LLC v. Steve Person, et. al., Cause No. 19-0651-C368 in the 368th Judicial District Court of Williamson County, Texas.
After the trial court issued a judgment on damages in the amount of $
The Landlord filed a second action on April 9, 2021 (Simpsonville Action 2), for claims similar to Simpsonville Action 1 including relief for payment of rent past due and reimbursement of taxes from October 2020 to the time of the trial in this action. This action captioned and numbered MC-Simpsonville, SC-UT, LLC v. Steve Person, James Walesa and Trident Healthcare Properties I, LP (“Trident”), Cause No. 21-0513-C425 in the 425th Judicial District Court of Williamson County, Texas. The court granted summary judgment in this matter in favor of the Landlord on April 14, 2023. On September 14, 2023, the court entered an order (the “Judgment Enforcement Order”) requiring the turnover of non-exempt assets of the defendants Steve Person and James Walesa and the assets of Trident Healthcare Properties I, LP and the appointment of a receiver to enforce the summary judgement. The Judgment Enforcement Order provides, in part, that “Nothing in this Order is intended to delay, hinder or disrupt the closing of the [Viveon] merger.” The Judgment Enforcement Order also provides certain restrictions regarding the sale or transfer of the Clearday securities owned by Steve Person or James Walesa, providing in part that “Any liquidation of the Clearday shares by Receiver requires approval of this Court, after notice and hearing, or written agreement of the parties. Nothing herein, however, prevents the transfer of the shares under the expected merger so long as Defendant and the receivership estate retain their rights in such shares. No party, including Defendants, shall encumber the shares except as specifically provided herein.”
Under the structure used for the lease and operations of the Simpsonville Facility, a subsidiary of Clearday, Inc., Tenant, is the direct obligor under the lease and another subsidiary of Clearday, Trident, is a guarantor of the lease obligations. Neither Tenant or Trident have any material assets. We are assessing the exposure of these matters to Clearday, Inc. under these actions, including any liability under indemnification agreements with the individual guarantors. We expect to offer to negotiate a settlement of the summary judgement. There can be no assurance that any such settlement discussions will be held or that there will be any settlement of these actions on terms that are acceptable or at all.
Employment related taxes
Certain
subsidiaries of the Company that operate hotel assets did not pay employment related taxes such as required withholdings for Texas
State unemployment taxes and federal income tax and employee and employer contributions for FICA (Social Security and Medicare)
taxes, and federal unemployment tax for certain periods from December 31, 2018, to December 31, 2021. These subsidiaries have since
made the appropriate filings with the Internal Revenue Service and the Company has accrued the full estimated amount of the
underpaid taxes as well as the estimated penalties and interest. As of June 30, 2023, the amount of the estimated taxes, penalties,
and interest, assuming that there is no waiver or mitigation of the penalties, is $
Certain subsidiaries of the Company that operate its residential care communities have not paid employment related taxes such as required withholdings for federal income tax and employee and employer contributions for FICA (Social Security and Medicare) taxes, and federal and state unemployment tax from and after the payroll periods that ended September 16, 2022, to the date of this Report. These subsidiaries have since made the appropriate filings with the Internal Revenue Service and the Company has accrued the amount of the underpayment in its financial statements as of June 30, 2023 and December 31, 2022, of approximately $1,197,672 and $527,000, respectively, which amount does not include any taxes, penalties, and interest. In connection with these matters, on August 3, 2023, the Internal Revenue Service issued a tax lien against MCA Management Company, Inc., a dormant and inactive subsidiary of Clearday, Inc. that does not have any assets.
Payroll related taxes
In
the fourth quarter of 2021, certain subsidiaries of the Company did not remit payroll taxes related to the Earned Retentions Tax Credit
(“ERTC”). The ERTC program permitted an offset for such obligations and was terminated during the fourth quarter with an
effective termination date of September 30, 2021. As a result, the Company has accrued $