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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2022

 

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 0-21074

 

CLEARDAY, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware   77-0158076

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

8800 Village Drive, Suite 106, San Antonio, Texas 78217

(Address of principal executive offices & zip code)

 

(210) 451-0839

(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. Yes ☒ No ☐

 

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

 

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
       
Non-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 No

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.001   CLRD   OTCQX

 

We had 17,775,992 shares of our common stock outstanding as of the close of business on May 20, 2022.

 

 

 

 

 

 

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 fund our innovative care products and services, including Clearday at Home;
     
  The impact of any financing activity on the level of our stock price;
     
  The dilutive impact of any issuances of securities to raise capital;
     
  Cost and uncertainty from compliance with environmental regulations and the regulations related to operating assisted living or memory care facilities;
     
  Local, regional, national and international economic conditions and events, and the impact they may have on us and our customers;
     
  Increases in our labor costs or in costs we pay for goods and services;
     
    Increases in tort and insurance liability costs;
     
    Delays or nonpayment of government payments to us; 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.

March 31, 2022

Table of Contents

 

    Page
PART I Financial Information 1
Item 1. Condensed Consolidated Financial Statements 1
  Condensed Consolidated Balance Sheets – March 31, 2022 and December 31, 2021 (unaudited) 1
  Condensed Consolidated Statements of Operations – Three Months ended March 31, 2022 and 2021 2
  Condensed Consolidated Statements of Trending Equity, Convertible Preferred Stock and Deficit – Three Months Ended March 31, 2022 and 2021 3
  Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2022 and 2021 4
  Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
Item 3 Quantitative and Qualitative Disclosures About Market Risk 37
Item 4 Evaluation of Disclosure Controls and Procedures. 37
PART II Other Information 38
Item 1. Legal Proceedings 38
Item 1A. Risk Factors 38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
Item 3. Defaults Upon Senior Securities 38
Item 4. Mine Safety Disclosures 38
Item 5. Other Information 38
Item 6. Exhibits 38

 

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. References in this report to “STI” or “Superconductor” are to the Company prior to the September 9, 2021 closing of the merger (the “AIU Merger”) by the Company with Allied Integral United, Inc. (“AIU”) that was described in our registration statement on Form S-4, as amended and supplemented (Registration No. 333-256138), 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

 

 

PART I

 

FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Clearday, Inc.

Condensed Consolidated Balance Sheets

 

   March 31, 2022     December 31, 2021 
   (unaudited)     
ASSETS        
Current assets:          
Cash  $125,836   $965,075 
Restricted cash   10,000    10,000 
Accounts receivable, net   44,616    50,761 
Prepaid expenses and other current assets   612,186    132,926 
Other current assets   2,763,936    2,763,936 
Current assets held for sale         - 
Total current assets   3,556,574    3,922,698 
           
Patents and development   8,930    8,930 
Operating lease right-of-use assets   32,358,269    32,818,019 
Property and equipment, net   7,793,615    7,418,836 
Other long-term assets   288,155    288,155 
Non-current assets held for sale    2,131,666    2,086,245 
Total assets  $46,137,209   $46,542,883 
LIABILITIES, TEMPORARY EQUITY AND DEFICIT          
Current liabilities:          
Accounts payable  $4,295,320   $3,392,772 
Accrued expenses   10,181,034    9,202,644 
Due to related parties   283,023    283,023 
Note Payable   3,803,238    3,228,212 
Current portion of long-term debt   4,379,427    3,941,782 
Operating lease liabilities   997,366    953,817 
Other current liabilities   1,489,730    1,110,000 
Current liabilities related to assets held for sale    1,551,192    1,438,192 
Total current liabilities   26,980,330    23,550,442 
           
Long-term liabilities:          
Operating lease liabilities   36,371,481    36,642,807 
Long-term debt, less current portion, net   5,559,694    5,572,427 
Non-current liabilities related to assets held for sale   643,486    712,847 
Total liabilities   69,554,991    66,478,523 
Commitments and contingencies   -    - 
Temporary equity          
Series F 6.75% Convertible Preferred Stock, $.001 par value, 5,000,000 share authorized, 4,797,052 and 4,797,052 issued and outstanding on March 31, 2022 and December 31, 2021, respectively. Liquidation value $99,534,543 and $96,296,493 on March 31, 2022 and December 31, 2021, respectively.   18,476,282    16,857,267 
           
Deficit:          
Preferred Stock, $0.001 par value, 10,000,000 shares authorized Series A Convertible Preferred Stock, $0.001 par value, 2,000,000 shares authorized, 328,925 and 328,925 shares issued and outstanding, as of March 31, 2022 and December 31, 2021, respectively. Liquidation value of $329 and $329 on March 31, 2022 and December 31, 2021, respectively   329    329 
Common Stock, $0.001 par value, 17,775,792 and 14,914,458 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively   17,774    14,915 
Additional paid-in-capital   11,576,374    17,069,481 
Accumulated deficit   (64,811,535)   (65,208,327)
Clearday, Inc. Shareholders’ deficit:   

(53,217,058

)   (48,123,602)
Non-controlling interest in subsidiaries   11,322,994    11,330,695 
Total deficit   (41,894,064)   (36,792,907)
TOTAL LIABLITIES, TEMPORARY EQUITY AND DEFICIT  $46,137,209   $46,542,883 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

1

 

 

Clearday, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

         
   Three Months Ended March 31, 
   2022   2021 
REVENUES        
Resident fee revenue, net   3,124,761   $3,744,061 
Adult Day Care and other revenue   83,896    - 
Commercial Property Rental Revenue   1,561   - 
Total revenues   3,210,218    3,744,061 
OPERATING EXPENSES          
Wages & general operating expenses   4,634,056    4,601,987 
Selling, general and administrative expenses   1,393,370    2,862,780 
Depreciation and amortization expense   187,215    174,459 
Total operating expenses   6,214,641    7,639,226 
           
Operating loss   (3,004,423)   (3,895,165)
           
Other (income) expenses          
Interest and other expenses   501,598    78,781 
PPP loan forgiveness   

(642,816

)   - 
Unrealized/loss on equity investments   -   (244,000)
Other (income)/expenses   

(143,889

)   (70,754)
Total other (income)/expenses   (285,107)   (235,973)
           
Net loss from continuing operations   (2,719,316)   (3,659,192)
Loss from discontinued operations, net of tax   (85,227)   (312,012)
Net loss   (2,804,543)   (3,971,204)
Net (loss) gain attributable to non-controlling interest   (144,265)   176,052 
Preferred stock dividend   (1,619,015)   (951,000)
Net loss applicable to Clearday, Inc.  $(4,567,823)  $(4,746,152)
           
Basic and diluted loss per share attributable to Clearday, Inc.          
Net loss from continued operations   (0.18)   (0.28)
Net loss/income from discontinued operations   (0.01)   (0.02)
Net loss   (0.19)   (.30)
Weighted average common shares basic and diluted outstanding   15,010,907    13,081,092 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

2

 

 

Clearday, Inc.

Condensed Consolidated Statements of Temporary Equity, Convertible Preferred Stock and Deficit

Three Months Ended March 31

 

                                             
   Temporary Equity Series F Preferred Stock   Preferred Stock Series A   Common Stock   Additional Paid- in   Accumulated   Clearday, Inc. Shareholder   Non-Controlling   Total 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit   Interest   Deficit 
                                             
Balance at December 31, 2020   4,606,853   $10,969,078    328,925   $329    13,048,942   $13,049   $17,913,638   $(45,522,907)  $(27,595,891)  $7,799,668   $(19,796,223)
Stock compensation for services   -    -    -    -    135,923    

136

    

689,776

    -    689,912    10,765    700,677 
Issuance of series I Convertible Preferred Stock in subsidiary   -    -    -    -    -    -    -    -    -    257,000    257,000 
Issuance of partnership units in subsidiary   -    -    -    -    -    -    -    -    -    413,062    413,062 
PIK dividends on Convertible Preferred Stock F   47,550    951,000    -    -            (951,000)      (951,000)    -    

(951,000

) 
Net loss   -    -    -    -    -    -    -    

(3,971,204

   

(3,971,204

   176,052    (3,795,152)
Balance at March 31, 2021   4,744,191    13,715,838    328,925    329    13,184,865     13,185     17,652,414    (49,494,111   (31,828,183    8,656,547    (23,171,636

 

   Temporary Equity Series F Preferred Stock   Preferred Stock Series A   Common Stock   Additional Paid- in   Accumulated   Clearday, Inc. Shareholder   Non-Controlling   Total 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit   Interest   Deficit 
Balance at January 1, 2021   4,797,052   $16,857,267    328,925   $329    14,914,458   $14,915   $17,069,481   $(65,208,327)  $(48,123,602)  $11,330,695   $(36,792,907)

PIK dividends

Accruals on Convertible Preferred Stock F

   -    1,619,015    -    -             (1,619,015)      (1,619,015         (1,619,015
Series F Incentive Common Stock                       2,861,334    2,859    (2,853)        6          6  
Accrued of series I Convertible Preferred Stock in subsidiary                                                136,564   136,564
Series I adjustment                                      (669,904)   (669,904)        (669,904)
Dissolution of Longhorn Hospitality   -    -    -    -    -    -    

(3,871,239

)   

3,871,239

    -         - 
Net loss   -    -    -    -    -    -    -    (2,804,543   

(2,804,543

   (144,265   (2,948,808
Balance at March 31, 2022    4,797,052     18,476,282     328,925    329     17,775,792      17,774      11,576,374    (64,811,535   (53,217,058    11,322,994    (41,894,064

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3

 

 

Clearday, Inc.

Condensed Consolidated Statements of Cash Flows

 

         
   For the Three Months Ended 
   March 31, 2022   March 31, 2021 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(2,804,543)  $(3,971,204)
Loss from discontinued operations, net of tax   (85,227)   (312,012)

Loss from continued operations

   (2,719,316)   (3,659,192)
Adjustments required to reconcile net loss to cash flows used in operating activities          
Depreciation and amortization expense   187,215    174,459 
Allowance for doubtful accounts        206,741 
Amortization of right of use assets   459,750    - 
Gain of PPP loan forgiveness   (642,816)   - 
Non-cash lease expenses        218,844 
Stock based compensation        637,896 
Amortization of debt issuance costs   501,970   258 
Unrealized gain on securities        (244,000)
Changes in operating assets and liabilities          
Accounts receivable   6,145    (133,436)
Prepaid expenses   (433,839)   6,314 
Accounts payable   902,548    570,502 
Accrued expenses   (181,935)   72,001 
Accrued interest        8,769 
Deferred revenue        (201,931)
Other non-current assets        1,692,243 
Other current liabilities   113,000    (1,552,398)
Change in operating lease liability   (227,777)   (73,867)
Net cash used in activities of continuing operations   (2,035,055)   (2,276,797)
Net cash provided by (used in) operating activities of discontinued operations   (45,421)   155,834 
Net cash used in operating activities   (2,080,476)   (2,120,963)
CASH FLOWS FROM INVESTING ACTIVITIES          
Payments for property and equipment   (13,348)   (26,720)
Proceeds from sale of non-consolidated subsidiary:        - 
Payment for capitalized software costs      (480,000)
Net cash used in investing activities of continuing operations   (13,348)   (506,720)
Net cash used in investing activities   (13,348)   (506,720)
CASH FLOWS FROM FINANCING ACTIVITIES          
Repayment of debt   

(977,263

)   38,202 
Borrowings on debt, net   2,130,268    2,345,180 
Proceeds from sale of preferred stock and member units in subsidiary   -    670,062 
Net cash provided by continuing operations   1,153,005   3,053,444 
Net cash used in financing activities of discontinued operations   101,580    (492,428)
Net cash provided by in financing activities   1,254,585   2,561,016 
Change in cash and restricted cash from continuing operations   (895,398)   269,927 
Change in cash and restricted cash from discontinued operations   56,159   (336,594)
Cash and restricted cash at beginning of the year   975,075    870,066 
Cash and restricted cash at end of year  $135,836   $803,399 
Reconciliation of cash and restricted cash consist of the following:          
End of period          
Cash and cash equivalents   125,836    696,915 
Restricted cash   10,000    106,484 
Total cash and restricted cash  $

135,836

   $803,399 
Beginning of period          
Cash and cash equivalents   965,075    780,262 
Restricted cash   10,000    89,804 
Total cash and restricted cash  $975,075   $870,666 
Supplemental cash flow information:          

 

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

 

4

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

1. Organization, Description of Organization, Basis of Presentation, Summary of Significant Accounting Policies, Liquidity and Going Concern

 

Description of Business

 

Clearday, Inc., a Delaware corporation (the “Company”), formerly known as Superconductor Technologies Inc., was established in 1987 and closed a merger with Allied Integral United, Inc., a Delaware corporation (“AIU”), on September 9, 2021. This merger was described in our registration statement (“Merger Registration Statement”) on Form S-4, as amended and supplemented (Registration No. 333-256138). Prior to the closing of the merger, the Company was a leading company in developing and commercializing high temperature superconductor (“HTS”) materials and related technologies. As described in the Merger Registration Statement, after the merger, the Company continued the businesses of AIU and continued the businesses of the Company related to its Sapphire Cryocooler and its related patents and intellectual property. AIU was incorporated on December 20, 2017 and began its business on December 31, 2018 when it acquired the businesses of five (5) memory care residential facilities and other businesses (the “2018 Acquisition”). The memory care business is conducted through the Company’s Memory Care America LLC subsidiary (“MCA”), which has been in the residential care business since November 2010 and has been managed by the Company’s executives for approximately 6 years. Since the 2018 Acquisition, the Company has been developing innovative care and wellness products and services focusing on the older American market.

 

All of the Company’s assets that were acquired in the 2018 Acquisition and are not related to the memory care facilities or the non-acute care and wellness industry were designated as non-core businesses and held for disposition. Accordingly, such assets and liabilities are classified as held for sale in the unaudited condensed consolidated balances sheets as of March 31, 2022, and December 31, 2021. Additionally, the results of operations for these non-core businesses are classified as income from discontinued operations within the unaudited condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021.

  

Liquidity and Going Concern

 

The Company has incurred significant cumulative consolidated operating losses and negative cash flows. As of March 31, 2022, the Company has an accumulated deficit of $64,811,535 continued loss from operations of $2,719,316 and net loss from discontinued operations in the amount of $85,227. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company plans to continue to fund its losses from operations and capital funding needs through public or private equity or debt financings or other sources, including the continued sale of its non-core assets and sale or disposition of other assets. If the Company is not able to secure adequate additional funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, or suspend or curtail planned programs. Any of these actions could materially harm the Company’s business, results of operations and future prospects. The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result should the Company not continue as a going concern. Management does not believe they have sufficient cash for the next twelve months from the date of this report to continue as a going concern without raising additional capital.

 

For the three months ended March 31, 2022, the Company entered into certain financing transactions related to the sale or forward sale of approximately $1,990,760 of revenues from the MCA residential fees. These transactions resulted in net proceeds of approximately $1,217,446. As of March 31, 2022, the repayment of these financing transactions ranges from 32 days to 288 days. (See “Note 6 – Indebtedness”)

 

2. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, including its wholly owned subsidiaries. In 2019, 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”), were formed by AIU. The Company owns all of the voting interests of AIU Alt Care and the sole general partner of Clearday OZ Fund, and less than 1% of the preferred economic interests in such companies.

 

In November, 2019, AIU Alt Care filed a certificate of designation that authorized preferred stock designated as the Series I 10.25% cumulative convertible preferred stock, par value $0.01 per share (the “Alt Care Preferred Stock”). The certificate of incorporation of AIU Alt Care authorizes 1,500,000 shares of preferred stock of which 700,000 is designated Alt Care Preferred Stock; and 1,500,000 of common stock. Each share of The Alt Care Preferred Stock has a stated value equal to the $10.00 Alt Care Preferred Stock original issue price.

 

In October, 2019, AIU Alt Care formed AIU Impact Management, LLC and Clearday OZ Fund was formed. AIU Impact Management, LLC manages Clearday OZ Fund as its general partner, owns 1% of Clearday OZ Fund and allocates 99% of income gains and losses accordingly to the limited partners.

 

The exchange rate for each of the Alt Care Preferred Stock and the limited partnership units in Clearday OZ Fund are equal to (i) the aggregate investment amount for such security plus accrued and unpaid dividends at 10.25% per annum, (ii) divided by 80% of the 20 consecutive day volume weighted closing price of the Common Stock of Clearday preceding the conversion date. Prior to the merger, the exchange rate was 1 share for every $10.00 of aggregate amount of the investment plus such accrued dividends.

 

The Company reports its non-controlling interest in subsidiaries as a separate component of equity in the unaudited condensed consolidated balance sheets and reports both net loss attributable to the non-controlling interest and net loss attributable to the Company’s common shareholders on the face of the unaudited condensed consolidated statement of operations.

 

5

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the annual financial statements of the Company and of AIU that are contained in the Company’s Form 10-K, as amended and supplemented. In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated upon consolidation. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

 

Basis of Presentation

 

Basis of Presentation - The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles in the United States of America for complete financial statements. In the opinion of the Company’s management, any adjustments contained in the accompanying unaudited consolidated financial statements are of a normal recurring nature, and are necessary to fairly present the financial position of the Company as of March 31, 2022, along with its results of operations for the three month periods ended March 31, 2022 and 2021 and cash flows for the three-month periods ended March 31, 2022 and 2021. Interim financial statements are prepared on a basis consistent with the Company’s annual financial statements and should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Results of operations for the three-month period ended March 31, 2022, are not necessarily indicative of the operating results that may be expected for the full year ending December 31, 2022.

 

Reclassifications

 

Certain prior period amounts have been reclassified on the accompanying condensed consolidated statements of operations and cash flows to conform to the current period presentation. This reclassification had no effect on previously reported net income (loss), deficit or cash flows from operating activities.

 

Classification of Convertible Preferred Stock

 

In 2022, the Company applied ASC 480, distinguishing liabilities from equity, and revised the consolidated financial statement presentation of its convertible preferred stock whose redemption is outside the control of the issuer. Registrants having such securities outstanding are required to present separately, in balance sheets, amounts applicable to the following three general classes of securities: (i) preferred stocks subject to mandatory redemption requirements or whose redemption is outside the control of the issuer; (ii) preferred stocks which are not redeemable or are redeemable solely at the option of the issuer; and (iii) common stocks. In addition, the rules require disclosure of redemption terms, five-year maturity data, and changes in redeemable preferred stock.

 

Unaudited Interim Financial Information

 

The unaudited condensed consolidated financial statements as of March 31, 2022 have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) and GAAP. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of the Company, these unaudited interim condensed consolidated financial statements contain all adjustments necessary, all of which are of a normal and recurring nature, to present fairly the Company’s financial position, results of operations and cash flows. Interim results are not necessarily indicative of results for a full year or future periods. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2021, as well as the audited consolidated financial statements of AIU that are included in our Annual Report on Form 10-K, as amended and supplemented.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities and contingencies at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Management believes that these estimates and assumptions are reasonable, however, actual results may differ and could have a material effect on future results of operations and financial position.

 

The impact of the COVID-19 pandemic could continue to have a material adverse effect on the Company’s business, results of operations, financial condition, liquidity, and prospects in the near-term and beyond 2022. While management has used all currently available information in its forecasts, the ultimate impact of the COVID-19 pandemic on its results of operations, financial condition and cash flows is highly uncertain, and cannot currently be accurately predicted. The Company’s results of operations, financial condition and cash flows are dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, such as a lengthy or severe recession or any other negative trend in the U.S. or global economy and any new information that may emerge concerning the COVID-19 outbreak and the actions to contain it or treat its impact, which at the present time are highly uncertain and cannot be predicted with any accuracy.

 

Significant estimates in our condensed consolidated financial statements relate to revenue recognition, including contractual allowances, the allowance of doubtful accounts, self-insurance reserves, long-lived assets, impairment of long-lived assets and estimates concerning our provisions for income taxes.

 

6

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Fair Value of Financial Instruments

 

The Company’s financial instruments are limited to cash, accounts receivable, debt and equity investments, accounts payable, operating leases and mortgage notes payable. The fair value of these financial instruments was not materially different from their carrying values on March 31, 2022.

 

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 one operating segment.

 

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.

 

Restricted cash as of March 31, 2022 and December 31, 2021 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.

 

Investments

 

The Company follows ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The Company has no investment in securities as of March 31, 2022.

 

Goodwill

 

Goodwill, which has an indefinite useful life, represents the excess of purchase consideration over fair value of net assets acquired. The Company determines whether goodwill may be impaired by comparing the carrying value of the single reporting unit, including goodwill, to the fair value of the reporting unit. If the fair value is less than the carrying amount, a more detailed analysis is performed to determine whether goodwill is impaired. The impairment loss, if any, is measured as the excess of the carrying value of the goodwill over the implied fair value of the goodwill and is recorded in the Company’s consolidated statements of operations.

 

Software Capitalization

 

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 per ASC350-40. Once the software has been developed, the costs to maintain and train others for its use will be expensed.

 

Risks and Uncertainties

 

The Company’s financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, investments, and trade receivables. At certain times throughout the year, the Company may maintain deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash balances due to the financial position of the depository institutions in which those deposits are held. The Company performs ongoing credit evaluations of its customers, and the risk with respect to trade receivables is further mitigated by the diversity, both by geography, of the customer base.

 

7

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was adopted.

 

The CARES Act appropriated funds for the U.S. Small Business Administration Paycheck Protection Program (“PPP”) loans that are forgivable in certain situations and employment related tax credits to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19. The Company continues to examine the impact that the CARES Act may have on its business and is currently, unable to determine the impact that the CARES Act will have on its financial condition, results of operations, or liquidity.

 

Earnings Per Share

 

Basic and diluted earnings per share are computed and disclosed in accordance with FASB ASC Topic 260, Earnings Per Share. The Company utilizes the two-class method to compute earnings available to common shareholders. Under the two-class method, earnings are adjusted by accretion amounts to redeemable noncontrolling interests recorded at redemption value. The adjustments represent dividend distributions, in substance, to the noncontrolling interest holder as the holders have contractual rights to receive an amount upon redemption other than the fair value of the applicable shares. As a result, earnings are adjusted to reflect this in substance distribution that is different from other common shareholders. In addition, the Company allocates net earnings to each class of common stock and participating security as if all of the net earnings for the period had been distributed. The Company’s participating securities consist of share-based payment awards that contain a non-forfeitable right to receive dividends and therefore are considered to participate in undistributed earnings with common shareholders. Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

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.

 

The allowance for doubtful accounts reflects estimates that the Company periodically reviews and revises based on new information, to which revisions may be material. The Company’s allowance for doubtful accounts consists of the following:

 

Allowance for Doubtful Accounts  Balance at Beginning of Period   Provision for Doubtful Accounts   Write-Offs   Balance at
End of Period
 
December 31, 2021  $68,911   $108,360   $(177,271)  $- 
March 31, 2022  $-    -    -    - 

 

Assets and Liabilities Held for Sale

 

The Company designated its real estate and hotels as held for sale when it is probable these non-core business assets will be sold within one year. The Company records these assets on the unaudited condensed consolidated balance sheets at the lesser of the carrying value and fair value less estimated selling costs. If the carrying value is greater than the fair value less the estimated selling costs, the Company records an impairment charge. The Company evaluates the fair value of the assets held for sale each period to determine if it has changed (See Note 5 – Discontinued Operations).

 

8

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Property and Equipment

 

Property and equipment are recorded at cost and depreciated using the straight-line basis over their estimated useful lives, which are typically as follows:

 

Asset Class  Estimated Useful Life (In Years) 
Buildings   39 
Building improvements   39 
Equipment   7 
Computer equipment and software   5 
Furniture and fixtures   7 

 

The Company regularly evaluates whether events or changes in circumstances have occurred that could indicate impairment in the value of the Company’s long-lived assets. If there is an indication that the carrying value of an asset is not recoverable, the Company determines the amount of impairment loss, if any, by comparing the historical carrying value of the asset to its estimated fair value, with any amount in excess of fair value recognized as an expense in the current period. The Company determines estimated fair value through an evaluation of recent financial performance, recent transactions for similar assets, market conditions and projected cash flows using standard industry valuation techniques. Undiscounted cash flow projections and estimates of fair value amounts are based on a number of assumptions such as revenue and expense growth rates, estimated holding periods and estimated capitalization rates (Level 3).

 

Valuation of Long-Lived Assets

 

Long-lived assets to be held and used, including property and equipment, right to use assets and definite life intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Note 3 - Real Estate, Property and Equipment, Net.

 

Gain (Loss) on Sale of Assets

 

The Company enters into real estate transactions which may include the disposal of certain commercial shopping centers and hotels, including the associated real estate; such transactions are recorded in Note 5 – Discontinued Operations. The Company recognizes gain or loss on these property sales when the transfer of control is complete. The Company recognizes gain or loss from the sale of equity method investments when the transfer of control is complete, and the Company has no continuing involvement with the transferred financial assets.

 

Legal Proceedings and Claims

 

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 establish 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 FASB, Accounting Standards Codification™, or ASC, Topic 450, Contingencies. Under FASB 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.

 

9

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Lease Accounting

 

The Company follows FASB ASC Topic 842, Leases, or ASC Topic 842, utilizing the modified retrospective transition method with no adjustments to comparative periods presented. 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.

 

Lessee

 

The Company regularly evaluates whether a contract meets the definition of a lease whenever a contract grants a party the right to control the use of an identified asset for a period of time in exchange for consideration. To the extent the identified asset is able to be shared among multiple parties, the Company has determined that one party does not have control of the identified asset and the contract is not considered a lease. The Company accounts for contracts that do not meet the definition of a lease under other relevant accounting guidance (such as ASC 606 for revenue from contacts with customers).

 

The Company’s lease agreements primarily consist of building leases. These leases generally contain an initial term of 15 to 17 years and may contain renewal options. If the Company’s lease agreements include renewal option periods, the Company includes such renewal options in its calculation of the estimated lease term when it determines the options are reasonably certain to be exercised. When such renewal options are deemed to be reasonably certain, the estimated lease term determined under ASC 842 will be greater than the non-cancelable term of the contractual arrangement.

 

The Company classifies its lessee arrangements at inception as either operating leases or financing leases. A lease is classified as a financing lease if at least one of the following criteria is met: (1) the lease transfers ownership of the underlying asset to the lessee, (2) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (3) the lease term is for a major part of the remaining economic life of the underlying asset, (4) the present value of the sum of the lease payments equals or exceeds substantially all of the fair value of the underlying asset, or (5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease if none of the five criteria described above for financing lease classification is met. The Company has no financing leases as of March 31, 2022.

 

ROU assets associated with operating leases are included in “Right of Use Asset” on the Company’s unaudited condensed balance sheet. Current and long-term portions of lease liabilities related to operating leases are included in “Lease Liabilities, Current” and “Lease Liabilities, Long-Term” on the Company’s balance sheet as of March 31, 2022. ROU assets represent the Company’s right to use an underlying asset for the estimated lease term and lease liabilities represent the Company’s present value of its future lease payments. In assessing its leases and determining its lease liability at lease commencement or upon modification, the Company was not able to readily determine the rate implicit for its lessee arrangements, and thus has used its incremental borrowing rate on a collateralized basis to determine the present value of the lease payments. The Company’s ROU assets are measured as the balance of the lease liability plus or minus any prepaid or accrued lease payments and any unamortized initial direct costs. Operating lease expenses are recognized on a ratable basis, regardless of whether the payment terms require the Company to make payments annually, quarterly, monthly, or for the entire term in advance. If the payment terms include fixed escalator provisions, the effect of such increases is recognized on a straight-line basis. The Company calculates the straight-line expense over the contract’s estimated lease term, including any renewal option periods that the Company deems reasonably certain to be exercised.

 

The Company reviews the carrying value of its ROU assets for impairment, similar to its other long-lived assets, whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company could record impairments in the future if there are changes in (1) long-term market conditions, (2) expected future operating results or (3) the utility of the assets that negatively impact the fair value of its ROU assets.

 

Lessor

 

The Company’s lessor arrangements primarily included tenant contracts within shopping centers, which is included in discontinued operations. The Company classifies its leases at inception as operating, direct financing, or sales-type leases. A lease is classified as a sales-type lease if at least one of the following criteria is met: (1) the lease transfers ownership of the underlying asset to the lessee, (2) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (3) the lease term is for a major part of the remaining economic life of the underlying asset, (4) the present value of the sum of the lease payments equals or exceeds substantially all of the fair value of the underlying assets or (5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. Furthermore, when none of the above criteria is met, a lease is classified as a direct financing lease if both of the following criteria are met: (1) the present value of the of the sum of the lease payments and any residual value guaranteed by the lessee, that is not already reflected in the lease payments, equals or exceeds the fair value of the underlying asset and (2) it is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. A lease is classified as an operating lease if it does not qualify as a sales-type or direct financing lease. Currently, the Company classifies all of its lessor arrangements as operating leases.

 

10

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Revenues from the Company’s lessor arrangements are recognized on a straight-line, ratable basis over the fixed, non-cancelable term of the relevant tenant contract, regardless of whether the payments from the tenant are received in equal monthly amounts during the life of a tenant contract. Certain of the Company’s tenant contracts contain fixed escalation clauses (such as fixed-dollar or fixed-percentage increases) or inflation-based escalation clauses (such as those tied to the change in CPI) and is included in discontinued operations. If the payment terms call for fixed escalations, upfront payments, or rent-free periods, the rental revenue is recognized on a straight-line basis over the fixed, non-cancelable term of the agreement. When calculating straight-line site rental revenues, the Company considers all fixed elements of tenant contractual escalation provisions.

 

Certain of the Company’s arrangements with tenants contain both lease and non-lease components. In such circumstances, the Company has determined (1) the timing and pattern of transfer for the lease and non-lease component are the same and (2) the stand-alone lease component would be classified as an operating lease. As such, the Company has aggregated certain non-lease components with lease components and has determined that the lease components represent the predominant component of the arrangement.

 

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 unaudited 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.

 

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 greater than 50% likelihood of being realized.

 

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. To the extent the Company establishes a valuation allowance or increase or decrease this allowance in a given period, the Company includes the related tax expense or tax benefit within the tax provision in the unaudited 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 unaudited 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 unaudited condensed consolidated statements of operations.

 

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 unaudited 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.

 

A substantial portion of the Company’s revenue at 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.

 

11

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Resident fees at our independent living and assisted living 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 unaudited consolidated financial statements. Some of our senior living communities require payment of an upfront entrance fee in advance of a resident moving into the community; substantially all of these community fees are non-refundable and are initially recorded as deferred revenue and included in accrued expenses and other current liabilities in our unaudited 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 unaudited condensed consolidated financial statements. 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.

 

Core Business – Continuing Operations

 

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 the first of the month. Funds received from resident in advance of services are not material to the Company’s unaudited condensed consolidated financial statements.

 

Below is a table that shows the breakdown by percent of revenues related to contracts with residents versus resident fees for support or ancillary services.

 

                 
   For the Three Months Ended March 31, 
   2022   %   2021   % 
Revenue from contracts with customers:                    
Resident rent - over time  $3,019,193    96%  $3,624,139    97%
Day care   83,896    3%   -      
Amenities and conveniences - point in time   21,672    1%   119,922    3%
Total revenue from contracts with customers  $3,124,761        $3,744,061      

 

Rent increases helped to augment revenue in 2022. However, total revenue decreased due to the relinquishment of operations in Simpsonville, NC. in September 2021, resulting in a decrease in total revenue in Q1. Day care revenue is from Primrose Day care center, which we purchased in the second quarter of 2021.  

  

Discontinued Operations

 

Hotels. During 2021, we sold or disposed of all of our remaining hotel properties.

 

12

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Cost of Product Revenue

 

Cost of product revenue represents direct and indirect costs incurred to bring the product to saleable condition.

 

Research and Development Expenses

 

All research and development costs are charged to expense as incurred. Research and development expenses primarily include (i) payroll and related costs associated with research and development performed, (ii) costs related to clinical and preclinical testing of the Company’s technologies under development, and (iii) other research and development costs including allocations of facility costs.

 

PPP Loans

 

The Company recognizes Paycheck Protection Program loans (PPP loans) under the Small Business Administration as debt instruments in accordance with ASC 470, Debt. When the loan proceeds are received, a long-term liability account (i.e., “PPP Loan Liability”) is set up. The presentation of the loan in the balance sheet is accounted for in accordance with U.S. GAAP regarding the presentation of assets and liabilities, whereas the portion of the loan due within 12 months from year end will be considered a current liability and the remaining portion will be considered a long-term liability. Also, under this guidance, a borrower should not recognize any income from the extinguishment of its debt until the borrower has been legally released as the primary obligor under the loan. In addition, the forgiveness of PPP loans as income will be recorded as other income and not included in income from operations based on the unprecedented nature of COVID-19.

 

HHS Government Grants

 

The Company recognizes income for government grants when grant proceeds are received and the Company determines it is reasonably assured that it will comply with the conditions of the grant, the Company will recognize the distributions received in the income statement on a systematic and rational basis. The Company will estimate the fair value of the grant using the applicable HHS definitions of health care related expenses and lost revenue attributable to COVID-19, considering the Company’s projected and actual results at the end of each reporting period.

 

ERTC Funds

 

The Company was eligible to claim the employee retention tax credit (“ERTC”) for certain employees under the CARES Act. The 2021 refundable tax credit is available to employers that fully (or partially) suspend operations during any calendar quarter in 2021 due to orders from an appropriate governmental authority, which limits commerce, travel, or group meetings due to COVID-19. The credit is equal to 70% of qualified wages paid after March 12, 2020 through December 31, 2020 to qualified employees, with a maximum credit of $7,000 per employee. The credit was modified and extended for wages paid from January 1, 2021, through December 31, 2021, by the “Consolidated Appropriations Act, 2021”. Certain of these credits are obtained by refunds of employer taxes that have been paid, and other amounts were obtained by reducing the amount of withholdings remitted to the IRS. The ERTC has recently been terminated as of fourth quarter of 2021. 

 

General and Administrative Expenses

 

General and administrative expenses represent personnel costs for employees involved in general corporate functions, including finance, accounting, legal and human resources, among others. Additional costs included in general and administrative expenses consist of professional fees for legal (including patent costs), audit and other consulting services, travel and entertainment, charitable contributions, recruiting, allocated facility and general information technology costs, depreciation and amortization, and other general corporate overhead expenses.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires a financial asset, or a group of financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This ASU eliminates the probable initial recognition threshold and instead requires reflection of an entity’s current estimate of all expected credit losses. In addition, this ASU amends the current available for sale security other-than-temporary impairment model for debt securities. The length of time that the fair value of an available for sale debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists and credit losses will now be limited to the difference between a security’s amortized cost basis and its fair value. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which amends the transition and effective date for nonpublic entities and clarifies that receivables arising from operating leases are not in the scope of this ASU. These ASUs are effective for reporting periods beginning after December 15, 2022. The Company is assessing the potential impact that the adoption of these ASUs will have on its unaudited condensed consolidated financial statements.

 

In December 2019, the FASB also issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies certain requirements under Topic 740, including eliminating the exception to intra-period tax allocation when there is a loss from continuing operations and income from other sources, such as other comprehensive income or discontinued operations. The amendments in this ASU are effective for the fiscal year beginning after December 15, 2020. The Company has determined that this ASU does not have a material impact on its unaudited condensed consolidated financial statements.

 

13

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

3. Real Estate, Property and Equipment, Net

 

Property and equipment, net, consists of the following:

 

Memory Care Facilities and Corporate

 

  

Estimated

Useful Lives

 

March 31, 2022

  

December 31, 2021

 
            
Land     $1,255,477   $1,255,477 
Building and building improvements  39 years   4,508,797    4,508,797 
Furniture, fixtures, and equipment  3-7 years   5,621,211    5,127,466 
Total      11,385,535    10,891,740 
Less accumulated depreciation      (3,591,920)   (3,472,904)
Real estate, property and equipment, net     $7,793,615   $7,418,836 

 

Non-core businesses classified as assets held for sale:

 

  

Estimated

Useful Lives

  March 31, 2022   December 31, 2021 
Land     $1,688,070   $1,688,070 
Building and building improvements  39 years   

466,447

    

466,447

 
Furniture, fixtures and equipment  5-7 years   -    - 
Other  3-5 years   -    - 
Total      2,154,517    2,154,517 
Less: accumulated depreciation      (68,272)   (68,272)
Real estate, property and equipment, net     $2,086,245   $2,086,245 

 

The Company recorded depreciation expense relating to real estate, property, and equipment for the Company’s memory care facilities and corporate assets in the amount of $187,215 and $174,459 for the three months ended March 31, 2022 and 2021, respectively.

 

The Company has reviewed the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If there is an indication that the value of an asset is not recoverable, the Company determines the amount of impairment loss, if any, by comparing the historical carrying value of the asset to its estimated fair value. The Company determined estimated fair value based on input from market participants, the Company’s experience selling similar assets, market conditions and internally developed cash flow models that the Company’s assets or asset groups are expected to generate, and the Company considers these estimates to be a Level 3 fair value measurement.

 

Based on the Company’s review of carrying value of long-lived assets included in discontinued operations, the Company concluded that a)several of its properties were sold and did not warrant consideration; b) certain properties belonging to their continuing operations segment generate revenue, are cash flow positive and have assets with low carrying values as compared to the recoverable amounts and therefore do not meet impairment requirements; and that c) several properties might be impaired due to extended closures. Both the SeaWorld and Buda hotels have experienced extended closures since March, 2020 due to the COVID-19 pandemic and this has meant significant reductions in cash flows and on the ability to repay the mortgage loans on the properties.

 

14

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

4. Leases

 

The Company follows ASC 842, as discussed in Note 1 – Summary of Significant Accounting Policies, the Company has elected the package of practical expedients offered in the transition guidance which allows management not to reassess the lease identification, lease classification, and initial direct costs. The Company has elected the accounting policy practical expedient to exclude recording short term leases for all asset classes, as right-of-use assets, and lease liabilities on the unaudited condensed consolidated balance sheet. Finally, the Company has elected to recognize lease components and non-lease components separately for real estate leases.

 

Leases for Memory Care Facilities

 

The Company leases three memory care facilities from MHI-MC San Antonio, LP, MHI-MC Little Rock, LP, and MHI-MC New Braunfels, LP (collectively “MHI entities”) under three separate lease agreements and originally recorded a right of use asset and a lease liability of $35,782,153. The Amended Leases contain three options to renew, which were not considered reasonably certain of being exercised as of the lease commencement date nor the balance sheet date.

 

As of March 31, 2022, the Company leased one memory care facility from MC-Simpsonville, SC-1-UT, LLC (the “Simpsonville Landlord”) under a 15-year non-cancelable lease agreement. Provided the Company is not in default, the lease agreement has three successive five-year renewal options and has the right of first refusal to acquire the Simpsonville Landlord’s interest in the property in certain situations. Beginning January 2019, the Company ceased paying the Simpsonville Landlord rent. The Landlord filed a lawsuit against the guarantors of the lease and on October 21, 2020, the trial court issued a final judgment of the damages for the plaintiff in the amount of $2,801,365. The trial court has not made findings of fact related to the Company’s liability under the Lease. Additionally, the Company has appealed the trial court judgement as they believe it has reasonable likelihood of success to reduce certain fees in the amount of $190,043 in past taxes and $248,074 in attorney’ fees. the Company has accrued an amount that it determines is reasonable with respect to this contingency. See Note 7 – Commitments and Contingencies for additional information. 

 

All leases are classified as operating leases. The Company does not have any leases within its non-core business. Therefore, no right-of-use assets or lease liabilities were recorded within non-current assets held for sale or lease liability on the unaudited condensed consolidated balance sheet following the adoption of ASC 842. Weighted-average remaining lease terms and discount rate as of March 31, 2022, are 13.5 years and 8.25%, respectively.

 

15

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Lease Costs

 

For the three months ended March 31, 2022 and 2021, the lease costs recorded in the unaudited condensed consolidated statement of operations are as follows:

 

         
   For the Three Months Ended March 31, 
   2022   2021 
Lease costs:          
Operating lease costs  $1,189,145   $1,129,542 
Short-term lease costs   10,994    18,487 
Total lease costs  $1,200,139   $1,148,029 

 

Operating Lease Payments

 

The following table summarizes the maturity of the Company’s operating lease liabilities as of March 31, 2022:

 

Year Ending  Operating Leases 
2022 (Remaining of 2022)  $3,018,593 
2023   4,114,830 
2024   4,211,664 
2025   4,310,799 
2026   4,412,289 
2027   4,516,191 
2028   4,622,562 
Thereafter   35,667,127 
Total minimum lease payments  $64,874,055 
Less: amounts representing interest   27,505,208 
Present value of future minimum lease payments   37,368,847 
Less: current portion   997,366 
Non-current lease liabilities  $36,371,481 

 

 5. Discontinued Operations

 

The Company held two hotel properties during 2021, each of which were classified as non-core assets and were sold or disposed of during 2021.

 

16

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

During the quarter ended March 31, 2022, the Company did not sell any non-core assets:

  

On April 5, 2022, Leander Associates, Ltd., a Texas limited partnership (“Seller”) also executed a Purchase and Sale Agreement with Leander Ridge, LLC, a Texas limited liability company (“Buyer”) to sell one of Clearday’s non-core assets: a land parcel located in Leander, Texas (the “Leander Property”) for a consideration of $392,040 per acre ($9.00/sf) of developable land, for an approximate total amount of $1,842,588 (the “Purchase Price”). The Sale Agreement provides a 90-day period following the April 4, 2022 effective date, or until July 5, 2022 (the “Feasibility Period”), for the purchaser to inspect the Leander Property and conduct their analysis, appraisals and other examination of the Leander Property, including environmental inspections.

 

The following statements are the unaudited condensed consolidated balance sheets and income statements for the Company’s discontinued operations:

 

     March 31, 2022     December 31, 2021 
         
ASSETS          
Current assets:          
Cash and cash equivalents  $-   $- 
Restricted cash   -    - 
Accounts receivable   -    - 
Prepaid expenses   45,421    - 
Total current assets  $45,521   $ 
           
Investments in non-consolidated entities   -    - 
Note Receivables   -    - 
Real estate, property and equipment, net   2,086,245    2,086,245 
Total long-term assets held for sale   2,086,245    2,086,245 
TOTAL ASSETS  $2,131,666   $2,086,245 
LIABILITIES          
Current liabilities:          
Accounts payable       $- 
Accrued expenses  $446,192    438,192 
Accrued interest        - 
Current portion of long-term debt   1,105,000    1,000,000 
Total current liabilities   1,551,192    1,438,192 
           
Long-term liabilities:          
Note payable   421,470    487,678 
Long-term debt, less current portion   222,016    225,169 
Total long-term liabilities held for sale   643,486    712,847 
TOTAL LIABILITIES  $2,194,678   $2,151,039 

 

17

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

         
   Three Months Ended March 31, 
   2022   2021 
REVENUES        
Commercial property rental revenue   $14,239   $20,867 
Total revenues, net    

14,239

    20,867 
           
Costs and expenses           
Operating expenses    -    43,328 
General and administrative expenses    36,636    268,646 
Total operating expenses   $36,636   $311,973 
           
Loss from operations    (22,307)   (291,107)
           
Other/(income) expenses           
Interest expense    44,151    23,825 
Gain on disposal of assets    -    15,000 
Equity income from investees, net of applicable taxes    -    - 
Impairment expense (recovery)    -    -
Other (income) expenses    18,768    (17,920)
Total (income)/expense    62,920    20,905 
           
Net loss   $(85,227)  $(312,012)

 

6. Indebtedness

 

As of March 31, 2022 and December 31, 2021, the current portion of long-term debt within the Company’s unaudited condensed financial statements for our core MCA and Corporate facilities is $5,700,171 and $1,105,000 respectively.

 

As of March 31, 2022 and December 31, 2021the long term debt less the current portion of the company debt is and $5,292,473. This debt is expected to be repaid primarily with the proceeds from the sales of these assets. See Note 2 – Summary of Significant Accounting Policies for more information about the Company’s assets held for sale.

 

Interest and Future Maturities

 

The Company has recorded interest expense in the accompanying unaudited condensed consolidated financial statements of $501,598 and $78,781 for the three months ended March 31, 2022 and 2021, respectively, and $44,151 and $23,825 for discontinued operations for the same periods.

 

The change in the interest expense reflects primarily the impact of the factoring loans we have taken out which carry a higher interest rate.

 

As of March 31,    Continuing Core       Discontinued Non-Core        Total   
2022   6,732,807    300,000    7,032,807 
2023   6,952,243    805,000    7,757,243 
2024    0      0    0 
2025   500,000    487,678    987,678 
Thereafter     0      222,016    222,016 
Total obligations  $14,185,050   $ 1,814,694   $15,999,744 

 

18

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

The following table summarizes the maturity of the Company’s long-term debt and notes payable as of March 31, 2022:

 

  Maturity  Interest   March 31,   December 31, 
   Date  Rate   2022   2021 
Memory Care (Core) Facilities:              
Naples Equity Loan  May-23   9.95%   4,550,000     4,550,000 
Libertas Financing Agreement  May-22   0.00%   -     283,685 
New Braunfels Samson Funding 1    Apr-22   0.00%   -     80,467 
New Braunfels Samson Group 2    Apr-22   0.00%   -     80,467 
Naples Operating LG Funding    Apr-22   0.00%   27,813     115,500 
Naples LLC CFG Merchant Solutions    Sept-22   0.00%   -     134,239 
Clearday Operating PPP Loans    Jan-22   1.00%   468,040     468,040 
MCA Invesque Loan    Jan-24   8.50%   -     57,452 
New Braunfels Business Loan    Jun-22   6.25%   42,940    64,072 
Gearhart Loan    Dec-22   7.00%      193,578     193,578 
Five C’s Loan    Dec-22   9.85%   325,000     325,000 
SBA PPP Loans    Feb-22   1.00%   1,400,142     2,042,958 
Buda 2K Hospitality LLC  Oct-22   15.00%   90,000    100,000 
Equity Secured Fund I, LLC    Jun-22   11.50%   1,000,000     1,000,000 
New Braunfels Samson Funding 1  Apr-23   0.00%   195,171    - 
New Braunfels Samson Group 2  Apr-23   0.00%   325,286    - 
Naples LLC CFG Merchant Solutions  Jan-23   0.00%   299,375    - 
Bank Direct Payable  Dec-22   

3.13

%   

765,872

      
Naples Operating PIRS Capital  Mar-23   0.00%   533,000    - 
Little Rock Libertas  Feb-23   0.00%   554,411    - 
Notional amount of debt         10,770,628    9,492,477 
Less: current maturities         5,700,171    4,910,863 
        $5,070,457   $4,581,614 
                   
Non-core businesses classified as liabilities held for sale:            
Real Estate:                
Artesia Note (6)    Jun-33   Variable    $222,016   $225,436 
Tamir Note  Jun-22   12.00%   300,000    300,000 
Leander Note    Apr-22   12.75%   -    700,000 
Leander Stearns National Association  Feb-23   10.38%   805,000    - 
Notional amount of debt         1,327,016    1,225,436 
Less: current maturities         1,105,000    1,000,000 
        $222,016   $225,436 

 

On the accompanying unaudited condensed consolidated balance sheet for core business operations includes $449,022 and $0 of unamortized debt discounts as of March 31, 2022 and 2021, respectively.

 

19

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

   Maturity Date 

Interest

Rate

   March 31, 2022   December 31, 2021 
Core Businesses (Continuing Operations) Notes Payable                  
Cibolo Creek Partners promissory note  December 2025   0.09%  $66,208   $66,208 
Primrose – Miscellaneous  July 2029   7.00%   -    - 
EIDL SBA Treas 310  December 2051        495,000    494,900 
AGP Promissory Note      2.00%   2,419,420    2,522,922 
Round Rock Development Partners Note  December 2025   0.09%   500,000    500,000 
Notional amount of debt           3,480,628    3,584,030 

Other Current Liabilities

Related Party Payable-Guarantee Fees

           283,023    283,023 
           $283,023   $283,023 
                   
Non-Core Businesses (Discontinued Continuing Operations) Notes Payable                  
Cibolo Creek Partners promissory note  December 2025   0.09%  $421,470   $421,470 
            421,470    421,470 

 

In addition, the Company has an obligation for the payment of the acquisition of the Primrose adult day care center of $100,000 on May 31, 2022.

 

Memory Care (Core) Facilities:

 

Naples Equity Loan

 

On April 29, 2021, the Company executed a secured promissory note with Benworth Capital Partners, LLC in the amount of $4,550,000. The original Naples mortgage was paid off in the amount of $2,739,195 and there were closing costs of $354,357 which netted the Company proceeds in the amount of $1,456,448. This secured promissory note is a two-year loan with interest only payments at a fixed interest rate of 9.95%. This loan is guaranteed by certain officers of the Company and is secured by the Memory Care facility located at 2626 Goodlette-Frank Road, Naples, Florida 34105.

  

PPP Loans

 

In May 2020, the Company was granted four separate loans under the Paycheck Protection Program (the “PPP Loans”) administered by the United States Small Business Administration (“SBA”) established under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which has enabled the Company to retain the Company’s employees during the period of disruption created by the Coronavirus pandemic. STI was granted one loan in March 2021. The PPP Loans, which are evidenced by Notes issued by the Company (the “Note”), mature in May 2022 and bear interest at a fixed rate of 1.0% per annum, accruing from May 2020 (“Loan Date”) and payable monthly. The Note is unsecured and guaranteed by the SBA. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The Note provides for customary defaults, including failure to make payment when due or to fulfill the Company’s obligations under the notes or related documents, reorganizations, mergers, Consolidations or other changes to the Company’s business structure, and certain defaults on other indebtedness, bankruptcy events, adverse changes in financial condition or civil or criminal actions. The PPP Loans may be accelerated upon the occurrence of a default. We have three of the PPP loans remaining (including STI) which we expect to be forgiven in the upcoming months.

 

20

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

AGP Promissory Note

 

The Company entered into an unsecured promissory note with A.G.P./Alliance Global Partners (“AGP”) which was the financial adviser to AIU in connection with the merger. The $2,419,420, principal balance amount due of this note represents the unpaid fee amount then owed to AGP for its services. Interest under this note accrues at 2% per annum. The Company makes monthly payments of $30,000 and will pay 50% of net proceeds (which shall be deemed gross proceeds minus direct selling costs, expenses and commissions) received, directly or indirectly, by the Company and/or its subsidiaries from the issuance of any equity or equity-linked financing (including convertible debt), less any selling commissions. Accrued and unpaid obligations of this note are due on September 10, 2022.

 

MCA Invesque Loan

 

On November 6, 2017, the Company executed a promissory note for $600,000 with Mainstreet Health Financing, LP. The loan had no prepayment penalties. In January 2018, a principal payment of $300,000 was made on this loan. In November 2018, this loan agreement was amended for the then-current principal balance of $300,000. Effective July 31, 2019, the Company signed an amended and restated promissory note with the landlord parties, as defined for the principal sum of $3.3 million (the “A&R MCA Note”), including the previously outstanding principal balance of $300,000. This note was paid off in February 2022. See Note 7 – Commitments and Contingencies.

 

New Braunfels Business Loan

 

On December 23, 2015, the Company executed a business loan agreement with ServisFirst Bank for $600,000. In October 2019, the loan was extended and now matures in March 2022. The loan has a fixed interest rate of 6.25%. The note is guaranteed by certain officers and directors of the Company and is collateralized by furniture, fixtures and equipment at MCA New Braunfels.

 

Gearhart Loan

 

On April 1, 2012, the Company executed a promissory note with Betty Gearhart for $200,000 (the “Gearhart Note”). Interest accrues at a fixed rate of 7.0% and is payable quarterly in January, April, July and October. In April 2015, the Company executed the First Amended and Restated Promissory Note in the principal amount of $238,578, which extended the maturity date until April 2017. The note is collateralized by the debtor granting a security interest to Betty Gearhart including all assets of MCA, LLC as well as any proceeds (including insurance proceeds) of any and all of the foregoing collateral. The maturity date of the loan was further extended in April 2017, April 2018 and April 2020. The Second Amendment to the Amended and Restated Promissory Note (the “Second Amendment”) was executed on March 5, 2020 in the principal amount of $218,578 and has a maturity date of April 1, 2021. The scheduled maturity date of this note has been further extended to December 31, 2022.

 

Five C’s, LLC Loan

 

As of April 1, 2019, the Five C’s LLC entered into an agreement issuing capital stock that reduced obligations under an existing promissory note to $325,000 that was payable one year after the initial loan was funded, with a right of AIU to extend the maturity date for an additional six-month period. As of December 31, 2020, this note was in default. Subsequently, in February 2021, an extension agreement was entered which set an interest rate of 9.85% per annum and rescheduled the maturity date to December 31, 2021. This note can be extended by the parties for successive six-month periods unless the noteholder provides a notice to the borrower that the term shall not be extended on or prior to the date that is 30 days prior than the expiration of the note.

 

Equity Secured Fund I, LLC

 

On March 26, 2021, the Company executed a promissory note for $1,000,000 with Equity Secured Fund I, LLC. The loan matures on April 26, 2022 and was subject to one (1) twelve (12)-month extension option. The interest rate of the loan is 11.50% and is guaranteed by certain officers and is collateralized the building located at 8800 Village Drive in San Antonio, Texas. Total proceeds received by the Company was $803,963 after adjusting the interest for the period amounting to approximately $115,000, which is classified as prepaid interest in the unaudited condensed unaudited condensed consolidated balance sheet; $44,891 and $5,575 that was paid for prepaid property tax and prepaid insurance respectively (both of which) are included in “net deferred finance cost” and $31,000 in closing costs.

 

Debt Related to Assets Held for Sale

 

2K Hospitality Secured Note

 

On August 18, 2021, the Company through its subsidiary that owned the Buda hotel property and a subsidiary that owns land located in Cibolo, Texas, jointly entered into a secured promissory note with 2K Hospitality, LLC, in the principal amount of $120,000, payable without interests (assuming no payment default) in 12 monthly payments commencing on November 1, 2021. The obligations are secured by a second mortgage on the Cibolo, Texas property. The obligations of this note are guaranteed by BJ Parrish, a director and Chief Operating Officer of the Company.

 

21

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Artesia Note

 

On April 1, 2013, the Company executed a promissory note with FirstCapital Bank of Texas, N.A. for a principal amount of $314,500 (“Artesia Note”). the Company executed an amendment to the Artesia Note on July 23, 2018 (“Amended Artesia Note”). The Amended Artesia Note had a principal balance of $266,048 upon execution. The original maturity date of the note was March 1, 2018, which was extended to June 23, 2033 in the Amended Artesia Note. The note requires equal monthly principal and interest payments through maturity and has no prepayment penalties. The note has a variable interest rate equal to the greater of 6.0% or the Prime rate plus 1.0%. The note is collateralized by a security interest in the property and other assets within the property and is guaranteed by certain officers and directors of the Company. As of March 31, 2022, the interest rate for this loan is 6% (the greater of 6% or the Prime rate of 3.25% plus 1.0%).

 

Tamir Note

 

On March 12, 2010, the Company executed a promissory note with Tamir Enterprises, Ltd. for a principal amount of $475,000 (“Tamir Note”). The Company has executed subsequent amendments to the Tamir Notes on March 1, 2013, March 12, 2016, and March 19, 2019 (collectively, the “Amended Artesia Note”). The Amended Artesia Note had a principal balance of $300,000 upon execution. As a result of the March 19, 2019 amendment, the maturity date of the note is March 12, 2022. The note requires monthly interest payments through maturity and has no prepayment penalties. The note has a fixed interest rate of 12.0% plus an additional 2% for accrued interest outstanding. The note is collateralized by a security interest in the property and other assets within the property and is guaranteed by certain officers and directors of the Company.

 

Leander Note

 

On October 5, 2018, the Company executed a loan agreement with Equity Security Investments for a principal amount of $700,000 (“Leander Note”) to refinance existing financing for the hotel. The note had an original maturity date of October 5, 2019 and was collateralized by a security interest in the property and other assets within the property and is guaranteed by certain officers and directors of the Company. The Company exercised an extension option which extended the maturity of the note to October 5, 2020. The note required interest only monthly payments with the full principal balance becoming due upon the maturity date. The note has a fixed interest rate of 12.75%. As of October 12, 2020, the maturity of the note was extended to April 5, 2021.

 

On February 10, 2022, the Company executed a $805,000 one-year loan on the Leander note that extends the new maturity date to February 10, 2023. The note has a fixed interest rate of 10.75%, which also includes a $56,000 interest reserve for one year in the withholdings. The loan is expected to be paid off at the time of the sale.

 

Notes Payable

 

The Company has notes payable to Cibolo Creek Partners, LLC, its affiliate Round Rock Development Partners, LP. These notes have a maturity date of December 31, 2025, and there is no interest accruing on any of these notes. Each of these lenders was a related party when the obligations were incurred. For more information, see Note 9 - Related Party Transactions.

 

7. Commitments and Contingencies

 

Contingencies

 

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 regarding alleged material construction and related defects of the Simpsonville Facility and other memory care facilities that have been built by Embree and are leased by subsidiaries of MCA, including the significant costs and additional investment that was required by MCA to remedy such defects. The Tenant has stopped paying rent and related charges under the lease for the Simpsonville Facility from and after January 1, 2019. The Landlord has made demands for past rent but has not instituted legal action against the Tenant. Instead, the Landlord filed a lawsuit against the guarantors of the lease, including Trident Healthcare Properties I, L.P., referred to as Trident, which is a wholly owned subsidiary of the Company and an unconditional guaranty of such lease; and the personal guarantors of the Tenant’s obligations under the Lease, including the Company’s Chairman and Chief Executive Officer. The Company has an obligation to indemnify and hold such individuals (other than the Company’s Chairman) harmless under such personal guarantees, and Trident is a consolidated subsidiary in the Company’s financial statements. The Company’s Chairman has indemnified the Company for all obligations of the Company with respect to obligations to the Landlord in connection with this litigation, including the Company’s obligations to such indemnified individuals and the Company’s subsidiaries. This litigation is captioned and numbered MC-Simpsonville, SC-UT, LLC v. Steve Person, et. al., Cause No. 19-0651-C368 and is pending in the 368th Judicial District Court of Williamson County, Texas. On October 21, 2020, the trial court has issued a judgment on damages in the amount of $2,801,365. The trial court has not made findings of fact related to the Tenant’s liability under the Lease. Additionally, the Guarantors has appealed the trial court judgement as they believed it has reasonable likelihood of success to reduce the judgment in the amount of $248,074 in attorney’s fees. The appellate court recently entered a ruling reversing and remanding the attorneys’ fees portion of the judgment to the trial court for renewed proceedings on that issue. After the entry of the appellate court’s ruling, the Guarantors filed a motion for rehearing on the narrow issue of pre-judgment interest calculation, on which the Guarantors believe that they have a reasonable likelihood of success. The Company has accrued an amount that it determines is reasonable with respect to this contingency. The Landlord filed a second action against Trident and the other guarantors on April 9, 2021, for claims similar to the action described above including relief for payment of rent past due and reimbursement of taxes from October 2020 to the time of the trial in this action. Trident and the other guarantors intend to respond to this action. The Company is not able to determine if it will prevail in such litigation. The Company has entered into an agreement to transfer certain operations, including lease obligations, of the Simpsonville Facility. See Note 16 - Subsequent Events.

 

22

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Certain subsidiaries of the Company that operate hotel assets have not paid 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 the period from December 31, 2018 to December 31, 2020. 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 March 31, 2022, the amount of the estimated taxes, penalties, and interest, assuming that there is no waiver or mitigation of the penalties, is $261,552. The Company has accrued this amount in its unaudited condensed consolidated financial statements as of March 31, 2022.

 

In addition, from time to time, the Company becomes involved in litigation matters in the ordinary course of its business. Such litigations include an action that alleges negligence and other claims regarding the death of a resident in a memory care facility. One case is Michael Inderrieden, Individually and as Personal Representative of the Estate of Thomas Inderrieden v. MCA Simpsonville Operating Company, LLC dba Memory Care of Simpsonville; Allied Integral United, Inc. dba Clearday; Memory Care America, LLC.; MCA Management Company, Inc.; and MC-Simpsonville, SC-1-UT, LLC, which action was brought in South Carolina state court on July 7, 2021 in which the plaintiff alleges various acts and breaches by the defendants that resulted in the death of a resident. Such action has been referred to the Company’s insurance carrier and is in the discovery phase of litigation and mediation has been scheduled. Although the Company is unable to predict with certainty the eventual outcome of any litigation, the Company does not believe any of its currently pending litigation is likely to have a material adverse effect on its business.

 

Indemnification Agreements

 

Certain lease and other obligations of the Company are guaranteed in whole or in part by James Walesa and/or BJ Parrish and others. The Company has agreed to indemnify and hold each such individual harmless for all liabilities and payments on account of any such guaranty. The lease obligations of the Company for its lease obligations for four of its five MCA facilities, including the lease of the MCA community that is located in Simpsonville, South Carolina, referred to as the Simpsonville facility. This is the facility that is the subject of litigation and judgement against certain of our subsidiaries. We have been fully indemnified by James Walesa for all obligations that the Company may incur with respect to an adverse judgement against the Company, including any post-judgement interest. Such indemnification by James Walesa is under an agreement dated as of July 30, 2020. Under such agreement, James Walesa receives a fee equal to 2% of the total amount payable by AIU or any of its subsidiaries which is payable in units of shares of the Clearday Care Preferred and Clearday Warrants at $10.00 per unit, which is the same as the cash payment for such units by third parties in the offering of such units by Clearday Care. In the event that Mr. Walesa is required to make any payments under this indemnification, then the Company will issue shares of Clearday Care Preferred and Clearday Warrants, at $10.00 per unit, for the amount of such payment.

 

Subsequently, an amendment to the indemnification agreement above was signed on January 19, 2021 in which additional securities were pledged on behalf of James Walesa for all obligations that Company may incur with respect to an adverse judgement and/or any post-judgement interest. In the event that Mr. Walesa is required to make any payments under this amended indemnification agreement, then Company will issue shares of AIU Care, AIU Warrants and AIU Common Stock at $10.00 per unit as well as the AIU Series A Preferred at $20.00 per unit, for the amount of such payment.

 

23

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

8. Earnings Per Share

 

Basic net income (loss) per common share is calculated by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of common shares and potentially dilutive securities outstanding for the period. For the Company’s diluted earnings per share calculation, the Company uses the “if-converted” method for preferred stock and convertible debt and the “treasury stock” method for Warrants and Options.

 

The following tables set forth the potentially dilutive shares that were anti-dilutive in their respective periods as the Company had net losses in 2022 and 2021, respectively.

 

Dilution shares calculation 

For the Three Months Ended

March 31,

 
   2022   2021 
Series A Convertible Preferred Stock   328,925    - 
Series F 6.75% Convertible Preferred Stock   4,797,052    4,749,191 
Series I 10.25% Convertible Preferred Stock   320,657    313,829 
Limited Partnership Units   99,038    99,038 
Warrants   4,038,801    1,107,896 
Stock Options   -    - 
Total participating securities   9,584,473    6,269,954 

 

2,861,334 shares of Common Stock were issued and distributed to holders of the Clearday, Inc. Series F Preferred Stock that did not sell such shares until six months after the effective date of the merger. The date of the issuance was March 29, 2022.

 

9. Related Party Transactions

 

Background

 

The Related Party Disclosures Topic provides disclosure requirements for related party transactions and certain common control relationships. Accounting and reporting issues concerning certain related party transactions and relationships are addressed in other Topics.

 

Information about transactions with related parties is useful in comparing an entity’s results of operations and financial position with those of prior periods and with those of other entities. It helps users of financial statements to detect and explain possible differences.

 

Debt

 

There are some loans in which executive management has loaned money to the Company. In addition, there are loans made by the Company itself in which certain executives personally guarantee the debt.

 

Cibolo Creek Partners, LLC (“Cibolo Creek”) and its affiliate Round Rock Development Partners, LP (“RRDP”) have from time to time made loans to us under revolving credit notes that bear interest at the then applicable federal rate and are payable on demand or other date that was specified by such lender. In December 2018, AIU acquired businesses affiliated with Cibolo Creek. As of March 31, 2022, Cibolo Creek and Round Rock were owed $421,470 and $500,000 respectively by the Company.

 

24

 

 

Clearday, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Guarantees

 

From time-to-time certain officers and directors will personally guarantee a loan. There is a guarantee fee agreement in place that details the amount of the fee as well as payment terms for certain executives in the Company. The amount of the fee is capped at 1% of the amount of the outstanding note regardless of how many guarantors there are on the loan.

 

Other Transactions

 

On February 18, 2022, MCA Naples, LLC (‘Seller’) executed a purchase agreement with Richard Morris, an executive vice president of the Company, and Arlene Berliner, JTWROS (the “Purchaser”) to sell undivided interests in the land and improvements (the “Naples Property”) that are used for its Memory Care of Naples care facility that is in Naples, Florida (the “Naples Facility”) for aggregate cash amount of $100,000. At the closing of this Purchase Agreement, the purchaser of this undivided interest in the Naples Property will hold an undivided interest in the Naples Property as tenants in common and will be party to a Tenant in Common Agreement (“TIC Agreement”).

  

13. Deficit

 

The certificate of incorporation of Clearday, Inc., as amended in connection with the merger, provides for 80,000,000 authorized shares of Common Stock and 10,000,000 authorized shares of preferred stock, each par value $0.001 per share.

 

Common Stock

 

AIU awarded restricted shares of its common stock in the amount of 57,000 shares (representing 135,923 shares of Clearday, Inc. Common Stock) to various officers, directors and a consultant; during the three months ended March 31, 2021. For the three months ended March 31, 2022, Clearday did not award any restricted stock.

 

Liquidation Preference

 

In the event of the Company’s liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of the Company’s debts and other liabilities and the satisfaction of any liquidation preferences that may be granted to the holders of any then outstanding shares of preferred stock.

 

Preferred Stock

 

Prior to the AIU Merger, AIU had Series A 6.75% cumulative convertible preferred stock, $0.01 par value, 4,797,052 shares of such securities were issued and outstanding as of December 31, 2021. Each share of Series A preferred stock has a stated value equal to the Series A original issue price. The conversion rate to the number of shares of AIU common stock is equal to 1 share for each share of Series A preferred stock. In connection with the securities, they were either converted into AIU common stock and then exchanged for the Company Common Stock or exchanged for shares of the Company’s Series F 6.75% cumulative convertible preferred stock, $0.001 par value. The Company has 5,000,000 shares authorized with 4,797,052 and 4,797,052 issued and outstanding as of March 31, 2022 and December 31, 2021, respectively. The Series F Preferred Stock has a stated value of $20.00 per share is exchangeable at the option of the holder into approximately 2.38 shares of the Company’s Common Stock, subject to adjustment for specified fundamental transactions such as stock splits, reverse stock splits and stock combinations. See Note 14 - Preferred Stock – Temporary, for accounting treatment of the Series F Preferred Stock.

 

The Series A Preferred Stock of the Company that was issued and outstanding prior to the merger remains issued and outstanding. Such preferred stock has a $.001 par value,