UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission
File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
(Address of principal executive offices & zip code)
(Registrant’s telephone number including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ or
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| OTCQX |
We had shares of our common stock outstanding as of the close of business on 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
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 | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Other current assets | ||||||||
| Current assets held for sale | - | |||||||
| Total current assets | ||||||||
| Patents and development | ||||||||
| Operating lease right-of-use assets | ||||||||
| Property and equipment, net | ||||||||
| Other long-term assets | ||||||||
| Non-current assets held for sale | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES, TEMPORARY EQUITY AND DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Due to related parties | ||||||||
| Note Payable | ||||||||
| Current portion of long-term debt | ||||||||
| Operating lease liabilities | ||||||||
| Other current liabilities | ||||||||
| Current liabilities related to assets held for sale | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Operating lease liabilities | ||||||||
| Long-term debt, less current portion, net | ||||||||
| Non-current liabilities related to assets held for sale | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Temporary equity | ||||||||
| Series F | ||||||||
| Deficit: | ||||||||
| Preferred Stock, $ par value, shares authorized Series A Convertible
Preferred Stock, $ par value, shares authorized, and shares issued and outstanding, as of March 31,
2022 and December 31, 2021, respectively. Liquidation value of $ | ||||||||
| Common Stock, $ par value, and shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Clearday, Inc. Shareholders’ deficit: | ( | ) | ( | ) | ||||
| Non-controlling interest in subsidiaries | ||||||||
| Total deficit | ( | ) | ( | ) | ||||
| TOTAL LIABLITIES, TEMPORARY EQUITY AND DEFICIT | $ | $ | ||||||
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 | $ | |||||||
| Adult Day Care and other revenue | - | |||||||
| Commercial Property Rental Revenue | - | |||||||
| OPERATING EXPENSES | ||||||||
| Wages & general operating expenses | ||||||||
| Selling, general and administrative expenses | ||||||||
| Depreciation and amortization expense | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other (income) expenses | ||||||||
| Interest and other expenses | ||||||||
| PPP loan forgiveness | ( | ) | - | |||||
| Unrealized/loss on equity investments | - | ( | ) | |||||
| Other (income)/expenses | ( | ) | ( | ) | ||||
| Total other (income)/expenses | ( | ) | ( | ) | ||||
| Net loss from continuing operations | ( | ) | ( | ) | ||||
| Loss from discontinued operations, net of tax | ( | ) | ( | ) | ||||
| Net loss | ( | ) | ( | ) | ||||
| Net (loss) gain attributable to non-controlling interest | ( | ) | ||||||
| Preferred stock dividend | ( | ) | ( | ) | ||||
| Net loss applicable to Clearday, Inc. | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted loss per share attributable to Clearday, Inc. | ||||||||
| Net loss from continued operations | ( | ) | ( | ) | ||||
| Net loss/income from discontinued operations | ( | ) | ( | ) | ||||
| Net loss | ( | ) | ( | ) | ||||
| Weighted average common shares basic and diluted outstanding | ||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 2 |
Clearday, Inc.
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 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||
| Stock compensation for services | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of series I Convertible Preferred Stock in subsidiary | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Issuance of partnership units in subsidiary | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| PIK dividends on Convertible Preferred Stock F | - | - | ( | ) | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | | | ( | ) | ( | ) | | ( | ) | |||||||||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||
PIK dividends Accruals on Convertible Preferred Stock F | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Series F Incentive Common Stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Accrued of series I Convertible Preferred Stock in subsidiary | ||||||||||||||||||||||||||||||||||||||||||||
| Series I adjustment | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Dissolution of Longhorn Hospitality | - | - | - | - | - | - | ( | ) | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance at March 31, 2022 | | | | | | ( | ) | ( | ) | | ( | ) | ||||||||||||||||||||||||||||||||
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 | $ | ( | ) | $ | ( | ) | ||
| Loss from discontinued operations, net of tax | ( | ) | ( | ) | ||||
Loss from continued operations | ( | ) | ( | ) | ||||
| Adjustments required to reconcile net loss to cash flows used in operating activities | ||||||||
| Depreciation and amortization expense | ||||||||
| Allowance for doubtful accounts | ||||||||
| Amortization of right of use assets | - | |||||||
| Gain of PPP loan forgiveness | ( | ) | - | |||||
| Non-cash lease expenses | ||||||||
| Stock based compensation | ||||||||
| Amortization of debt issuance costs | ||||||||
| Unrealized gain on securities | ( | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ||||||
| Accrued interest | ||||||||
| Deferred revenue | ( | ) | ||||||
| Other non-current assets | ||||||||
| Other current liabilities | ( | ) | ||||||
| Change in operating lease liability | ( | ) | ( | ) | ||||
| Net cash used in activities of continuing operations | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities of discontinued operations | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Payments for property and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of non-consolidated subsidiary: | - | |||||||
| Payment for capitalized software costs | ( | ) | ||||||
| Net cash used in investing activities of continuing operations | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayment of debt | ( | ) | ||||||
| Borrowings on debt, net | ||||||||
| Proceeds from sale of preferred stock and member units in subsidiary | - | |||||||
| Net cash provided by continuing operations | ||||||||
| Net cash used in financing activities of discontinued operations | ( | ) | ||||||
| Net cash provided by in financing activities | ||||||||
| Change in cash and restricted cash from continuing operations | ( | ) | ||||||
| Change in cash and restricted cash from discontinued operations | ( | ) | ||||||
| Cash and restricted cash at beginning of the year | ||||||||
| Cash and restricted cash at end of year | $ | $ | ||||||
| Reconciliation of cash and restricted cash consist of the following: | ||||||||
| End of period | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| $ | $ | |||||||
| Beginning of period | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| $ | $ | |||||||
| 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 $
For
the three months ended March 31, 2022, the Company entered into certain financing transactions related to the sale or forward sale
of approximately $
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
In
November, 2019, AIU Alt Care filed a certificate of designation that authorized preferred stock designated as the Series I
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
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 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.
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 | $ | $ | $ | ( | ) | $ | ||||||||||
| 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 | ||||
| Building improvements | ||||
| Equipment | ||||
| Computer equipment and software | ||||
| Furniture and fixtures | ||||
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
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
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 | $ | % | $ | % | ||||||||||||
| Day care | % | - | ||||||||||||||
| Amenities and conveniences - point in time | % | % | ||||||||||||||
| Total revenue from contracts with customers | $ | $ | ||||||||||||||
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 $
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 | $ | $ | ||||||||
| Building and building improvements | ||||||||||
| Furniture, fixtures, and equipment | ||||||||||
| Total | ||||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||||
| Real estate, property and equipment, net | $ | $ | ||||||||
Non-core businesses classified as assets held for sale:
Estimated Useful Lives | March 31, 2022 | December 31, 2021 | ||||||||
| Land | $ | $ | ||||||||
| Building and building improvements | ||||||||||
| Furniture, fixtures and equipment | - | - | ||||||||
| Other | - | - | ||||||||
| Total | ||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Real estate, property and equipment, net | $ | $ | ||||||||
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 $
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 $
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 $
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
| 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 | $ | $ | ||||||
| Short-term lease costs | ||||||||
| Total lease costs | $ | $ | ||||||
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) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total minimum lease payments | $ | |||
| Less: amounts representing interest | ||||
| Present value of future minimum lease payments | ||||
| Less: current portion | ||||
| Non-current lease liabilities | $ | |||
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 $
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 | ||||||||
| Total current assets | $ | $ | ||||||
| Investments in non-consolidated entities | ||||||||
| Note Receivables | ||||||||
| Real estate, property and equipment, net | ||||||||
| Total long-term assets held for sale | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | |||||||
| Accrued expenses | $ | |||||||
| Accrued interest | ||||||||
| Current portion of long-term debt | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Note payable | ||||||||
| Long-term debt, less current portion | ||||||||
| Total long-term liabilities held for sale | ||||||||
| TOTAL LIABILITIES | $ | $ | ||||||
| 17 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| REVENUES | ||||||||
| Commercial property rental revenue | $ | $ | ||||||
| Total revenues, net | ||||||||
| Costs and expenses | ||||||||
| Operating expenses | - | |||||||
| General and administrative expenses | ||||||||
| Total operating expenses | $ | $ | ||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other/(income) expenses | ||||||||
| Interest expense | ||||||||
| Gain on disposal of assets | - | |||||||
| Equity income from investees, net of applicable taxes | - | - | ||||||
| Impairment expense (recovery) | - | - | ||||||
| Other (income) expenses | ( | ) | ||||||
| Total (income)/expense | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
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 $
As
of March 31, 2022 and December 31, 2021the long term debt less the current portion of the company debt is and $
Interest and Future Maturities
The
Company has recorded interest expense in the accompanying unaudited condensed consolidated financial statements of $
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 | | | ||||||||||
| 2023 | ||||||||||||
| 2024 | | | ||||||||||
| 2025 | | | ||||||||||
| Thereafter | | | ||||||||||
| Total obligations | $ | $ | | $ |
| 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 | % | | ||||||||||||
| Libertas Financing Agreement | % | - | ||||||||||||
| New Braunfels Samson Funding 1 | % | - | ||||||||||||
| New Braunfels Samson Group 2 | % | - | ||||||||||||
| Naples Operating LG Funding | % | | ||||||||||||
| Naples LLC CFG Merchant Solutions | % | - | ||||||||||||
| Clearday Operating PPP Loans | % | | ||||||||||||
| MCA Invesque Loan | % | - | ||||||||||||
| New Braunfels Business Loan | % | |||||||||||||
| Gearhart Loan | % | | ||||||||||||
| Five C’s Loan | % | | ||||||||||||
| SBA PPP Loans | % | | ||||||||||||
| Buda 2K Hospitality LLC | % | |||||||||||||
| Equity Secured Fund I, LLC | % | | ||||||||||||
| New Braunfels Samson Funding 1 | % | |||||||||||||
| New Braunfels Samson Group 2 | % | |||||||||||||
| Naples LLC CFG Merchant Solutions | % | |||||||||||||
| Bank Direct Payable | % | |||||||||||||
| Naples Operating PIRS Capital | % | |||||||||||||
| Little Rock Libertas | % | |||||||||||||
| Notional amount of debt | ||||||||||||||
| Less: current maturities | ||||||||||||||
| $ | $ | |||||||||||||
| Non-core businesses classified as liabilities held for sale: | ||||||||||||||
| Real Estate: | ||||||||||||||
| Artesia Note (6) | $ | $ | ||||||||||||
| Tamir Note |
| % | ||||||||||||
| Leander Note | % | |||||||||||||
| Leander Stearns National Association | % | |||||||||||||
| Notional amount of debt | ||||||||||||||
| Less: current maturities | ||||||||||||||
| $ | $ | |||||||||||||
On the accompanying unaudited condensed
consolidated balance sheet for core business operations includes $
| 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 | % | $ | $ | |||||||||||
| Primrose – Miscellaneous | % | |||||||||||||
| EIDL SBA Treas 310 | ||||||||||||||
| AGP Promissory Note | % | |||||||||||||
| Round Rock Development Partners Note | % | |||||||||||||
| Notional amount of debt | ||||||||||||||
Other Current Liabilities Related Party Payable-Guarantee Fees | ||||||||||||||
| $ | $ | |||||||||||||
| Non-Core Businesses (Discontinued Continuing Operations) Notes Payable | ||||||||||||||
| Cibolo Creek Partners promissory note | % | $ | $ | |||||||||||
In
addition, the Company has an obligation for the payment of the acquisition of the Primrose adult day care center of $
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 $
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 $
MCA Invesque Loan
On
November 6, 2017, the Company executed a promissory note for $
New Braunfels Business Loan
On
December 23, 2015, the Company executed a business loan agreement with ServisFirst Bank for $
Gearhart Loan
On
April 1, 2012, the Company executed a promissory note with Betty Gearhart for $
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 $
Equity Secured Fund I, LLC
On
March 26, 2021, the Company executed a promissory note for $
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 $
| 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 $
Tamir Note
On
March 12, 2010, the Company executed a promissory note with Tamir Enterprises, Ltd. for a principal amount of $
Leander Note
On
October 5, 2018, the Company executed a loan agreement with Equity Security Investments for a principal amount of $
On
February 10, 2022, the Company executed a $
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 $
| 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 $
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
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 $per unit as well as the AIU Series A Preferred at $per unit, for the amount of such payment.
| 23 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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.
| Dilution shares calculation | For the Three Months Ended March 31, | |||||||
| 2022 | 2021 | |||||||
| Series A Convertible Preferred Stock | ||||||||
| Series F 6.75% Convertible Preferred Stock | ||||||||
| Series I 10.25% Convertible Preferred Stock | ||||||||
| Limited Partnership Units | ||||||||
| Warrants | ||||||||
| Stock Options | ||||||||
| Total participating securities | ||||||||
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 $
| 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
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 $
13. Deficit
The certificate of incorporation of Clearday, Inc., as amended in connection with the merger, provides for authorized shares of Common Stock and authorized shares of preferred stock, each par value $ per share.
Common Stock
AIU awarded restricted shares of its common stock in the amount of shares (representing 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, $ par value, 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, $ par value. The Company has shares authorized with and issued and outstanding as of March 31, 2022 and December 31, 2021, respectively. The Series F Preferred Stock has a stated value of $ per share is exchangeable at the option of the holder into approximately 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 $ par value,