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 December 15, 2023.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995 for these forward-looking statements. Our forward-looking statements relate to future events or our future performance and include, but are not limited to, statements concerning our business strategy, future commercial revenues, market growth, capital requirements, new product introductions, expansion plans and the adequacy of our funding. Other statements contained in this Report that are not historical facts are also forward-looking statements. We have tried, wherever possible, to identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and other comparable terminology.
We caution investors that any forward-looking statements presented in this Report, or that we may make orally or in writing from time to time, are based on the beliefs of, assumptions made by, and information currently available to, us. Such statements are based on assumptions and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations, and those differences may be material. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include the following:
| ● | Our limited cash and a history of losses; | |
| ● | Our ability to finance our innovative care products and services, including our Longevity-tech platform and products and services that are in development; | |
| ● | The impact of any financing activity on the level of our stock price; | |
| ● | The impact of any default by us of certain indebtedness and the exercise by the lenders of their respective remedies including the right to convert stock and exercise warrants at a price that is a discount to our trading price; | |
| ● | The additional dilutive impact of any issuances of securities to raise capital, including any capital in anticipation and in advance of the previously reported merger (the “Viveon Merger”) of us with Viveon Health Acquisition Corp.; | |
| ● | The timing and amount of financing acquired in connection with the Viveon Merger; | |
| ● | The cost and uncertainty from compliance with environmental regulations and the regulations related to operating our memory care facility and adult day care center; | |
| ● | The effect of pandemics and other public health related issues on our businesses, including actions or additional regulations by State and Federal governments; | |
| ● | Local, regional, national and international economic conditions and events, and the impact they may have on us and our customers; | |
| ● | The impact of inflation to our businesses, including increases in our labor costs and other costs we pay for goods and services; | |
| ● | The impact of a shortage of workers in our industries and our ability to maintain costs while properly staffing our facilities; | |
| ● | The availability of state funds through civil money penalty grant programs; | |
| ● | Increases in tort and insurance liability costs; | |
| ● | Delays or nonpayment to us, including payments related to government or agency reimbursements; | |
| ● | Our ability to pay our liabilities, including tax obligations and the exercise of remedies by holders of our indebtedness; and | |
| ● | Circumstances that adversely affect the ability of older adults or their families to pay for our services, such as economic downturns, weakening investment returns, higher levels of unemployment among our residents or potential residents’ family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics. |
For further discussion of these and other factors see “Risk Factors” in our Annual Report on Form 10-K, as amended and supplemented.
This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report.
| I |
Clearday, Inc.
September 30, 2023
FORM 10-Q
Table of Contents
References in this Report to “Clearday”, the “Company”, “we”, “us” include Clearday, Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context indicates otherwise.
The mark “Clearday” is protected under applicable intellectual property laws. Solely for convenience, trademarks of Clearday referred to in this Report may appear without the TM symbol, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and related intellectual property rights.
| II |
Clearday, Inc.
Condensed Consolidated Balance Sheets
September 30, 2023, and December 31, 2022
(Unaudited)
| September 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Real estate property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Other non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Derivative liabilities | ||||||||
| Accrued interest | ||||||||
| Related party payables | ||||||||
| Deferred revenue | ||||||||
| Current portion long-term debt | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Long-term debt, less current portion, net | ||||||||
| Total liabilities | ||||||||
| Mezzanine equity | ||||||||
| Series F | ||||||||
| Commitments and contingencies (Note 7) | ||||||||
Stockholders’ Deficit: | ||||||||
| Preferred Stock, $ par value, shares authorized | ||||||||
| Series A Convertible Preferred Stock, $ par value, shares authorized, shares
issued and outstanding, as of both September 30, 2023, and December 31, 2022. Liquidation value of $ | ||||||||
| Common Stock, $ par value, shares authorized, and shares issued and outstanding at September 30, 2023, and December 31, 2022, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Clearday, Inc. stockholders’ deficit | ( | ) | ( | ) | ||||
| Non-controlling interest in subsidiaries | ||||||||
| Clearday Inc. stockholder’s total deficit | ( | ) | ( | ) | ||||
| TOTAL LIABLITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ DEFICIT | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 1 |
Clearday, Inc.
Condensed Consolidated Statements Of Operations
For The Three and Nine Months Ended September 30, 2023, and 2022
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| REVENUES | ||||||||||||||||
| Resident fee revenue, net | $ | $ | $ | $ | ||||||||||||
| Adult day care | ||||||||||||||||
| Commercial property rental revenue | ||||||||||||||||
| Total revenues | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Wages & general operating expenses | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Pre-merger related expenses | ||||||||||||||||
| Insurance expense | ||||||||||||||||
| Bad debt expense | ||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (income) expenses | ||||||||||||||||
| Interest expense | ||||||||||||||||
| PPP loan forgiveness | ( | ) | ||||||||||||||
| Derivative financing costs | ||||||||||||||||
| Fair value of derivative | ( | ) | ( | ) | ||||||||||||
| Loss (gain) on extinguishment of debt | ( | ) | ( | ) | ||||||||||||
| Loss on disposal of assets | ||||||||||||||||
| Loss on impairment of debt | ||||||||||||||||
| Gain on termination of lease | ( | ) | ||||||||||||||
| Other (income)/expenses | ( | ) | ( | ) | ||||||||||||
| Total other (income)/expenses, net | ( | ) | ( | ) | ||||||||||||
| Net loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from discontinued operations, net of tax | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Preferred stock dividend | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to common shareholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to non-controlling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to Clearday, Inc. shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted loss per share attributable to Clearday, Inc. shareholders | ||||||||||||||||
| Net loss from continued operations | ) | ) | ) | ) | ||||||||||||
| Net loss from discontinued operations | ||||||||||||||||
| Net loss | ) | ) | ) | ) | ||||||||||||
| Weighted average common shares basic and diluted outstanding | ||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 2 |
Clearday, Inc.
Consolidated Statements of Mezzanine Equity, Convertible Preferred Stock and Stockholders’ Deficit
Nine Months Ended September 30,
| Mezzanine Equity Series F Preferred Stock | Preferred Stock Series A | Common Stock | Additional Paid- in | Accumulated | Clearday, Inc. Stockholders’ | Non-Controlling | Total | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ($ | ) | ||||||||||||||||||||||||||||||
| PIK dividend accruals on convertible Series F Preferred stock | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Series F Preferred stock converted to common stock | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Accrual of Series I Convertible Preferred stock in subsidiary | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Series I Convertible Preferred stock adjustment | - | |||||||||||||||||||||||||||||||||||||||||||
| Stock compensation for services | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Stock issued for loan | ||||||||||||||||||||||||||||||||||||||||||||
| Dissolution of Longhorn Hospitality | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 3 |
| Mezzanine Equity Series F Preferred Stock | Preferred Stock Series A | Common Stock | Additional Paid- in | Accumulated | Clearday, Inc. Stockholders’ | Non-Controlling | Total | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||||
| PIK dividend accruals on Series F Preferred stock | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Series F Preferred stock converted to common Stock | ( | ) | ( | ) | - | |||||||||||||||||||||||||||||||||||||||
| Accrual of Series I Convertible Preferred stock in subsidiary | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Debt discount from derivative settlements | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Stock compensation for services | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Stock issued for loan | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Stock issued for extinguishment of debt | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 4 |
Clearday, Inc.
Condensed Consolidated Statements Of Cash Flows
For The Nine Months Ended September 30, 2023, and 2022
(Unaudited)
| September 30, 2023 | September 30, 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Loss from discontinued operations, net of tax | ( | ) | ||||||
| Loss from continued operations | ( | ) | ( | ) | ||||
| Adjustments required to reconcile net loss to cash flows used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Shares issued for loan commitment | ||||||||
| Shares issued for services | ||||||||
| Financing costs from derivative liabilities | ||||||||
| Gain on termination of lease | ( | ) | ||||||
| Series I preferred stock accumulated dividend | ||||||||
| Change in fair value of derivatives | ( | ) | ||||||
| Amortization of debt discount related to derivatives | ||||||||
| Amortization of debt issuance costs | ||||||||
| Loss on extinguishment of debt | ( | ) | ||||||
| Loss on impairment of debt – SPAC partner | ||||||||
| Loss on disposal of assets | ||||||||
| Bad debt expense | ||||||||
| Gain on PPP loan forgiveness | ( | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Other current assets | ||||||||
| Prepaid expenses | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued liabilities | ( | ) | ||||||
| Other current liabilities | ||||||||
| Deferred revenue | ( | ) | ||||||
| Related party payables | ||||||||
| Other non-current assets | ||||||||
| Other current liabilities | ( | ) | ||||||
| Change in operating lease liability | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Proceeds from sale of property and equipment | ||||||||
| Purchase of intangibles | ( | ) | ||||||
| Purchase of property and equipment | ( | ) | ||||||
| Net cash used in investing activities of the continuing operations | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payment of long-term debt | ( | ) | ( | ) | ||||
| Proceeds from borrowings on debt | ||||||||
| Net cash provided by in financing activities | ||||||||
| Change in cash and restricted cash from continuing operations | ( | ) | ( | ) | ||||
| Change in cash and restricted cash from discontinued operations | ||||||||
| Cash and restricted cash at beginning of the period | ||||||||
| Cash and restricted cash at end of period | $ | $ | ||||||
| Reconciliation of cash and restricted cash consist of the following: | ||||||||
| End of period | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| Total cash and restricted cash | $ | $ | ||||||
| Beginning of period | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| Total cash and restricted cash | $ | $ | ||||||
| Supplemental disclosures of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | ||||||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| Early lease termination fee | $ | $ | ||||||
| Series F incentive shares converted to common stock | ||||||||
| PIK dividends for Series F Preferred Stock | ||||||||
| Indebtedness used to pay off rent expense | ||||||||
| Accounts payable exchanged for common shares | ||||||||
| Debt discount on derivative liabilities | $ | |||||||
| Settlements on derivative liabilities | ||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 5 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Going Concern
Organization, Description of Business
Clearday, Inc., a Delaware corporation (the “Company”), formerly known as Superconductor Technologies Inc. (“STI”), was established in 1987 and closed a merger (the “AIU Merger”) with Allied Integral United, Inc., a Delaware corporation (“AIU”), on September 9, 2021. The Company continued the businesses of AIU and continued one of the businesses of STI. AIU was incorporated on December 20, 2017, and began its business on December 31, 2018, when it acquired memory care residential facilities and other businesses (the “2018 Acquisition”) that was conducted since November 2010. Since the 2018 Acquisition, the Company has been developing innovative care and wellness products and services focusing on the longevity market, including its Longevity-Tech Platform. In the first quarter of 2023, the Company disposed of three of its four full time memory care communities to focus on its digital care services, including robotics and its Longevity-Tech Platform. As of the second quarter of 2023, the Company owns and operates one residential care facility and one adult daycare facility, and its focus is marketing its digital care services to third parties.
Proposed merger with Viveon Health Acquisition Corp
The Company, Viveon Health Acquisition Corp. (“Viveon” or “Parent”), a Delaware corporation, VHAC2 Merger Sub, Inc. (“Merger Sub”), a Delaware corporation, and Viveon Health LLC, (“SPAC Representative”), a Delaware limited liability Company, entered into a merger agreement dated April 5, 2023 (the “Viveon Merger Agreement”)
Amendment
to the Viveon Merger Agreement - On August 28, 2023, the parties above amended and modified the Viveon Merger Agreement (the “First
Amendment”) to, among other things, (i) increase the merger consideration from $
As of the Amendment Effective Date, the Viveon Merger has not been completed nor has it been terminated. Furthermore, Clearday and Viveon have not filed Form S-4 with the Securities and Exchange Commission (“SEC”) and thus the merger is not yet pending government review and/or other necessary approvals.
Going Concern
As
of September 30, 2023, we have an accumulated deficit of $
2. Summary of Significant Accounting Policies
The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the interim reporting rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments (unless otherwise indicated), necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
Principles of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of the Company, including its wholly owned subsidiaries
and AIU Alternative Care, Inc., a Delaware corporation (“AIU Alt Care”) and Clearday Alternative Care Oz Fund, L.P, a Delaware
limited partnership (“Clearday OZ Fund”). The Company owns all of the voting interests of AIU Alt Care and the sole general
partner of Clearday OZ Fund, and less than
The
certificate of incorporation of AIU Alt Care authorizes shares of preferred stock designated as its Series I
AIU
Alt Care formed AIU Impact Management, LLC, which is the sole general partner and manager of Clearday OZ Fund. Clearday OZ Fund allocates
| 6 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Each
of the Alt Care Preferred Stock and the limited partnership interests in Clearday OZ Fund (“Clearday OZ LP Interests”) may
be exchanged by the holder of such securities into shares of Clearday common stock. The exchange rate for each of the Alt Care Preferred
Stock and the Clearday OZ LP Interests are equal to (i)
The Company reports its non-controlling interest in subsidiaries as a separate component of equity in the condensed consolidated balance sheets and reports both net loss attributable to the non-controlling interest and net loss attributable to the Company’s common stockholders on the face of the condensed consolidated statement of operations.
Basis of Presentation
The Company’s condensed consolidated financial statements have been prepared in conformity with GAAP. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Classification of Convertible Preferred Stock
The
Company applied ASC 480, “Distinguishing Liabilities from Equity”, and revised the condensed consolidated presentation of
its convertible preferred stock whose redemption is outside the control of the issuer.
Reclassification
Certain comparative amounts have been reclassified to conform to the financial statement presentation adopted for the current year. These reclassifications have no effect on previously reported net loss, total assets, total liabilities or total stockholders’ deficit.
Use of Estimates
The Company’s condensed consolidated financial statement preparation requires that management make estimates and assumptions which affect the reporting of assets and liabilities and the related disclosure of contingent assets and liabilities in order to report these condensed consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, the Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business as two operating segments, the Longevity-Tech Platform and Personal Care.
Cash, and Restricted Cash
Cash, consisting of short-term, highly liquid investments and money market funds with original maturities of three months or less at the date of purchase, are carried at cost plus accrued interest, which approximates market value.
Restricted cash includes cash that the Company deposited as security for obligations arising from property taxes, property insurance and replacement reserve the Company is required to establish escrows as required by its mortgages and certain resident security deposits.
Accounts Receivable
The Company records accounts receivable at their estimated net realizable value. Additionally, the Company estimates allowances for uncollectible amounts based upon factors which include, but are not limited to, historical payment trends, write-off experience, and the age of the receivable as well as a review of specific accounts, the terms of the agreements, the residents, the payers’ financial capacity to pay and other factors which may include likelihood and cost of litigation.
| 7 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Real Estate Property and Equipment, Net
Property and equipment are stated at cost less accumulated depreciation. Maintenance and repairs are charged to operations as incurred. Depreciation is based on the straight-line method over the estimated useful lives of the related assets. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts, and any resulting gain or loss is reflected in operations in the period realized.
Depreciation is computed on the straight-line method with useful lives as follows:
| Asset Class | Estimated Useful Life (in years) | |||
| Buildings and building improvements | ||||
| Leasehold improvements | ||||
| Furniture and fixtures and equipment | ||||
| Computer equipment and software | ||||
Intangible Assets, Net
Software Capitalization
Intangible
assets are stated at cost less accumulated amortization. Amortization is based on the straight-line method over the estimated useful
lives of the related assets. With regards to developing software, any application costs incurred during the development stage, both internal
expenses and those paid to third parties are capitalized and amortized per FASB Topic ASC 350-40 (“Internal-Use Software Accounting
& Capitalization”) based on the estimated useful life of
Impairment Assessment
The Company evaluates intangible assets and other long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This includes but is not limited to significant adverse changes in business climate, market conditions or other events that indicate an assets’ carrying amount may not be recoverable. The recoverability of these assets is measured by comparing the carrying amount of each asset to the future cash flows the asset is expected to generate. If the cash flows used in the test for recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value.
Revenue Recognition
The Company recognizes revenue from contracts with customers in accordance with ASC Topic 606, “Revenue from Contracts with Customers”, or ASC Topic 606, using the practical expedient in paragraph 606-10-10-4 that allows for the use of a portfolio approach, because we have determined that the effect of applying the guidance to our portfolios of contracts within the scope of ASC Topic 606 on our condensed consolidated financial statements would not differ materially from applying the guidance to each individual contract within the respective portfolio or our performance obligations within such portfolio. The five-step model defined by ASC Topic 606 requires the Company to: (i) identify its contracts with customers, (ii) identify its performance obligations under those contracts, (iii) determine the transaction prices of those contracts, (iv) allocate the transaction prices to its performance obligations in those contracts and (v) recognize revenue when each performance obligation under those contracts is satisfied. Revenue is recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services.
| 8 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A substantial portion of the Company’s revenue from its independent living and assisted living communities relates to contracts with residents for services that are generally covered under ASC Topic 606. The Company’s contracts with residents and other customers that are within the scope of ASC Topic 606 are generally short-term in nature. The Company has determined that services performed under those contracts are considered one performance obligation in accordance with ASC Topic 606 as such services are regarded as a series of distinct events with the same timing and pattern of transfer to the resident or customer. Revenue is recognized for those contracts when the Company’s performance obligation is satisfied by transferring control of the service provided to the resident or customer, which is generally when the services are provided over time.
Resident fees at our residential communities consist of regular monthly charges for basic housing and support services and fees for additional requested services, such as assisted living services, personalized health services and ancillary services. Fees are specified in our agreements with residents, which are generally short term (30 days to one year), with regular monthly charges billed in advance. Funds received from residents in advance of services provided are not material to our condensed consolidated financial statements. Our senior living communities require payment of an upfront entrance fee in advance of a resident moving into the community; substantially all these community fees are non-refundable and are initially recorded as deferred revenue in our condensed consolidated balance sheets. These deferred amounts are then amortized on a straight-line basis into revenue over the term of the resident’s agreement. When the resident no longer resides within our community, the remaining deferred non-refundable fees are recognized in revenue. Revenue recorded and deferred in connection with community fees is not material to our condensed consolidated 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.
Resident Care Contracts
Resident fees at the Company’s senior living communities may consist of regular monthly charges for basic housing and support services and fees for additional requested services and ancillary services. Fees are specified in the Company’s agreements with residents, which are generally short term (30 days to one year), with regular monthly charges billed on the first of the month. Funds received from residents in advance of services are not material to the Company’s condensed consolidated financial statements.
Below is a table that shows the breakdown by percentage of revenues related to contracts with residents versus resident fees for support or ancillary services.
| For the three-month period ended September 30, | ||||||||||||||||
| 2023 | % | 2022 | % | |||||||||||||
| Revenue from contracts with customers: | ||||||||||||||||
| Resident rent - over time | $ | % | $ | % | ||||||||||||
| Day care – point in time | % | % | ||||||||||||||
| Amenities and conveniences - point in time | % | % | ||||||||||||||
| Total revenue from contracts with customers | $ | % | $ | % | ||||||||||||
| For the nine-month periods ended September 30, | ||||||||||||||||
| 2023 | % | 2022 | % | |||||||||||||
| Revenue from contracts with customers: | ||||||||||||||||
| Resident rent - over time | $ | % | % | |||||||||||||
| Day care – point in time | % | % | ||||||||||||||
| Amenities and conveniences - point in time | % | % | ||||||||||||||
| Total revenue from contracts with customers | $ | % | $ | % | ||||||||||||
Financial Instruments
In accordance with the reporting requirements of the FASB ASC Topic 825, “Financial Instruments”, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this standard and includes this additional information in the notes to the consolidated financial statements when the fair value is different than the carrying value of those financial instruments. The Company does not have assets or liabilities measured at fair value on a recurring basis except its derivative liabilities.
| 9 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at the balance sheet dates, nor gains or losses reported in the statements of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held during the periods presented, except as disclosed.
Fair Value Measurement
ASC Topic 820, “Fair Value Measurements”, provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices such as equities listed on the New York Stock Exchange.
Level 2 - Pricing inputs are other than quoted prices in active markets but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using highly observable inputs.
Level 3 - Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation such as complex and subjective models and forecasts used to determine the fair value.
The following tables present the Company’s assets and liabilities that were measured and recognized at fair value as of September 30, 2023, and December 31, 2022:
| September 30, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Derivative liabilities | ||||||||||||||||
| December 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Derivative liabilities | ||||||||||||||||
Under the Company’s contract ordering policy, the Company first considers common shares issued and outstanding as well as reserved but unissued equity awards, such as under an equity award program. All remaining equity linked instruments such as, but not limited to, options, warrants, debt and equity with conversion features are evaluated based on the date of issuance. If the number of shares which may be issued under the Company’s agreements exceed the authorized number of shares or are unable to be determined, equity linked instruments from that date forward are considered to be derivative liabilities until such time as the number of shares which may be issued under the Company’s agreements no longer exceed the authorized number of shares and are able to be determined.
The Company has outstanding note agreements containing provisions meeting the definition of derivative liabilities which therefore require bifurcation. Further, pursuant to the Company’s contract ordering policy, any issuance of equity linked instruments after the initial triggering agreement will result in derivative liabilities.
At September 30, 2023, the Company estimated the fair value of the conversion feature derivatives embedded in its debt instruments and warrants based on assumptions used in the Cox-Ross-Rubinstein binomial pricing model using the following inputs: the price of the Company’s common stock of $; risk-free interest rates ranging from % to %; expected volatility of the Company’s common stock ranging from % to %; estimated exercise prices ranging from $ to $; and terms from to .
At December 31, 2022, the Company estimated the fair value of the conversion feature derivatives embedded in debt instruments and warrants based on assumptions used in the Cox-Ross-Rubinstein binomial pricing model using the following inputs: the price of the Company’s common stock of $; risk-free interest rates ranging from % to %; expected volatility of the Company’s common stock ranging from % to %; estimated exercise prices ranging from $ to $; and terms from to .
| 10 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the changes in the Company’s Level 3 derivative liabilities at fair value is as follows:
| Balance - December 31, 2022 | $ | |||
| Additions | ||||
| Settlements | ( | ) | ||
| Change in fair value | ( | ) | ||
| Balance - September 30, 2023 | $ |
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC Topic 815, “Derivatives and Hedging Activities”.
Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: When necessary the Company records discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the debt transaction and the effective conversion price embedded in the debt instrument. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.
Research and Development Costs
Research and development costs are charged to expense as incurred and are included in operating expenses. There were no research and development costs incurred in the three or nine months ended September 30, 2023, or 2022.
Advertising Costs
The costs of advertising are expensed as incurred. Advertising expenses are included in the Company’s operating expenses. There were no advertising expenses in the three or nine months ended September 30, 2023, or 2022.
Lease Accounting
The Company follows ASC Topic 842, “Leases”. The Company has elected the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. All Right of Use (“ROU”) assets were written off effective March 31, 2023, when the Company disposed of the three leased properties described in Note 5 — Leases.
Income Taxes
The Company’s income tax expense includes U.S. income taxes. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences to be included in the Company’s condensed consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse, while the effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
| 11 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Company can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained
upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with
a tax position is measured as the largest amount that has a
Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income, and, to the extent, the Company believes that the Company is more likely than not that all or a portion of deferred tax assets will not be realized, the Company establishes a valuation allowance to reduce the deferred tax assets to the appropriate valuation.
The Company includes the related tax expense or tax benefit within the tax provision in the condensed consolidated statement of operations in that period. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In the future, if the Company determines that it would be able to realize its deferred tax assets in excess of their net recorded amount, the Company will make an adjustment to the deferred tax asset valuation allowance and record an income tax benefit within the tax provision in the condensed consolidated statement of operations in that period.
The Company pays franchise taxes in certain states in which it has operations. The Company has included franchise taxes in general and administrative and operating expenses in its condensed consolidated statements of operations.
FASB ASC Topic 260, “Earnings Per Share”, requires a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share (EPS) computations.
Basic earnings (loss) per share are computed by dividing income (loss) attributable to Clearday shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
Commitments and Contingencies
The Company has been, is currently, and expects in the future to be involved in claims, lawsuits, and regulatory and other government audits, investigations and proceedings arising in the ordinary course of the Company’s business, some of which may involve material amounts. The Company establishes accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Also, the defense and resolution of these claims, lawsuits, and regulatory and other government audits, investigations and proceedings may require the Company to incur significant expense. The Company accounts for claims and litigation losses in accordance with ASC Topic 450, “Contingencies”. Under ASC Topic 450, loss contingency provisions are recorded for probable and estimable losses at the Company’s best estimate of a loss or, when a best estimate cannot be made, at the Company’s estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment and are refined as additional information becomes known. Accordingly, the Company is often initially unable to develop a best estimate of loss and therefore the estimated minimum loss amount, which could be zero, is recorded; then, as information becomes known, the minimum loss amount is updated, as appropriate. Occasionally, a minimum or best estimate amount may be increased or decreased when events result in a changed expectation.
Recently Adopted Accounting Pronouncements
None.
Recently Issued Accounting Pronouncements applicable to the Company but not yet adopted.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (a) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (b) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (c) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share for convertible instruments by using the “if-converted” method. In addition, entities must presume share settlement for purposes of calculating diluted earnings per share when an instrument may be settled in cash or shares. ASU 2020-06 is effective for the Company beginning January 1, 2024. The Company is currently evaluating the impact that ASU 2020-06 may have on its condensed consolidated financial statements and related disclosures.
| 12 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Real Estate, Property and Equipment
The Company’s real estate, property and equipment consisted of the following at the respective balance sheet dates:
| September 30, 2023 | December 31, 2022 | |||||||
| Land | $ | $ | ||||||
| Building and building improvements | ||||||||
| Leasehold Improvements | ||||||||
| Computers | ||||||||
| Furniture, fixtures, and equipment | ||||||||
| Other Equipment | ||||||||
| Construction in progress | ||||||||
| Total | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Real estate, property and equipment, net | $ | $ | ||||||
The
Company recorded depreciation expenses relating to real estate, property, and equipment in the amount of $
4. Intangible Assets, Net
Software Capitalization.
The net carrying amount of our internally
developed software related to our Longevity Tech Platform totaled $
Developed intangible assets subject to amortization are as follows:
| September 30, 2023 | ||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted-Average Remaining Useful Life (Years) | |||||||||||||
| Developed technology | $ | $ | $ | |||||||||||||
| Technology for future deployment | ||||||||||||||||
| Total Intangible assets | $ | $ | $ | |||||||||||||
The
Company recorded amortization expense related to its intangible assets in the amounts of $
Expected future amortization expense for intangible assets as of September 30, 2023, is as follows:
| Fiscal Years | ||||
| 2023 (remaining) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
| 13 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| December 31, 2022 | ||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization |
Net Carrying Amount | Weighted-Average Remaining Useful Life (Years) |
|||||||||||||
| Developed technology | $ | $ | $ | |||||||||||||
5. Leases
Lease Terminations
On
March 31, 2023, the Company entered into agreements (collectively, the “Lease Transition Agreement”) to terminate the
leases (“Community Leases”) for three of its four residential care facilities, which account for all of Clearday’s
leased residential care facilities. The Community Leases related to residential communities (the “Communities”) located
in Westover, Texas, New Braunfels, Texas and Little Rock, Arkansas. Terminating the Community Leases removed the related ROU assets
and ROU liabilities as of March 31, 2023. Additionally, the related net leasehold improvements and personal property in these
Communities were written off. We currently have no material economic rights or obligations under the Community Leases other than for
payment obligations under the Lease Transition Agreements. The Lease Transition Agreement provided, among other matters, that the
aggregate liability of the Clearday subsidiaries that are tenants under the Community Leases are reduced to amount (the
“Repayment Amount”) that is equal to the sum of: (1) past due rent payments under the Community Leases of $
In
connection with the Lease Transition Agreements, the tenants under the Community Leases and the Clearday, Inc. subsidiaries that operated
the Communities signed a promissory note for the Repayment Amount and the Past Due Community Lease Amounts and Clearday, Inc. agreed
to be an additional guarantor of the obligations of the Community Leases, as modified and limited by the Community Lease Transition Agreement,
which is less than approximately $
In connection with the proposed termination of the Community Leases, the subsidiaries that operate the Communities (the “Current Operators”) and subsidiaries of the New Operator (“New Communities Operators”) entered into the previously reported Operations Transfer Agreement dated as of April 1, 2023, (the “OTA”). The OTA and Interim Agreements provide for the asset purchase and sale of the memory care businesses at the Communities, and the transfer of certain agreements and the assumption of certain specified liabilities. The Current Operators, each of which is a subsidiary of Clearday, Inc., remain obligated for liabilities that are not assumed by the New Operators. The New Communities Operators have employed, or offered employment to, all of our employees at these communities and will fund and be responsible for any operating cash losses for the Communities.
6. Indebtedness
At
September 30, 2023, the Company had total outstanding debt in the amount of $
| 14 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes future payments required to be made on the Company’s debt.
| At September 30, | Total | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total obligations | $ | |||
The following tables summarizes the Company’s debt.
| At September 30, | Total | |||
| Facility Indebtedness | ||||
| Merchant Cash Advance Loans | ||||
| Indebtedness Allocated to Real Estate | ||||
| Other Corporate Indebtedness | ||||
| TIC Purchase Agreements | ||||
| Total Obligations | ||||
| Debt Discount & Derivatives | ( | ) | ||
| Total obligations, net | $ | |||
The following table provides details of the Company’s debt at September 30, 2023, and December 31, 2022:
Indebtedness of Facilities and Properties
| Maturity Date | Interest Rate | September 30, 2023 | December 31, 2022 | |||||||||||
| Naples Equity Loan ^ | % | $ | $ | |||||||||||
| Gearhart Loan ^ | % | |||||||||||||
| SBA PPP Loans # | % | |||||||||||||
| IPFS D&O Insurance | % | |||||||||||||
| Bank Direct Payable | % | |||||||||||||
| Bank Direct Payable | % | - | ||||||||||||
| AIU Sixth Street | % | |||||||||||||
| 1800 Diagonal Lending | % | |||||||||||||
| Equity Secure Fund I, LLC* | % | |||||||||||||
| Invesque, Inc. ** | % | - | ||||||||||||
Merchant Cash Advance Loans (^^)
| Naples Operating PIRS Capital | % | $ | $ | |||||||||||
| Little Rock Libertas | % | |||||||||||||
| PIRS Capital Financing Agreement | % | |||||||||||||
| Naples Samson #1 | % | |||||||||||||
| Naples LG Funding #2 | % | |||||||||||||
| Little Rock Premium Funding | % | |||||||||||||
| Little Rock KIT Funding | % | |||||||||||||
| Little Rock Samson Funding #4 | % | |||||||||||||
| Naples Operating SWIFT | % | |||||||||||||
| New Braunfels Samson Cloud Fund | % | |||||||||||||
| New Braunfels Samson Group | % | |||||||||||||
| Westover Hills One River | % | |||||||||||||
| Westover Hills FOX Capitol | % | |||||||||||||
| Westover Hills Arsenal | % | |||||||||||||
| Westover Samson Funding | % | |||||||||||||
| Subtotal merchant cash advance loans | ||||||||||||||
| Notional amount of debt | ||||||||||||||
| Less: current maturities | ||||||||||||||
| $ | $ |
| 15 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Indebtedness Allocated to real estate
| Real Estate: | ||||||||||||||
| Artesia Note | Variable | $ | $ | |||||||||||
| Carpenter Enterprises | Variable | |||||||||||||
| Leander Stearns National Association | % | |||||||||||||
| Notional amount of debt | ||||||||||||||
| Less: current maturities | ||||||||||||||
| $ | $ |
Other (Corporate) Indebtedness
| AGP Contract and Note^*** | % | $ | $ | |||||||||||
| Cibolo Creek Partners | % | |||||||||||||
| Cibolo Creek Partners promissory note | % | |||||||||||||
| EIDL SBA Treas 310 | % | |||||||||||||
| Firstfire | % | |||||||||||||
| Five C’s Loan ^ | % | |||||||||||||
| GS Capital | % | |||||||||||||
| Jefferson Street Capital LLC @ | % | |||||||||||||
| KOBO, L.P. | Floating | % | ||||||||||||
| Mast Hill LP @ | % | |||||||||||||
| Mast Hill LP @ | % | |||||||||||||
| Round Rock Development Partners Note | % | |||||||||||||
| Jefferson Street Capital LLC (February 2023) | % | |||||||||||||
| Mast Hill LP (January 2023) @ | % | |||||||||||||
| Bridge Financings (convertible to common stock | | % | ||||||||||||
| Rom Papadopolous | ||||||||||||||
| Convertible Notes Issued by AIU Alternative Care, Inc. | % | |||||||||||||
| Notional amount of debt | ||||||||||||||
| Less: current maturities | ||||||||||||||
| $ | $ | |||||||||||||
| TIC Purchase Agreements | No Specified Date | % | $ | $ | ||||||||||
| Total | ||||||||||||||
| Less Debt Discount & Derivatives | ( | ) | ( | ) | ||||||||||
| Total | $ | $ |
| ^ | |
| ^^ | |
| # | |
| @ | Mast Hill LP granted a forbearance dated October 4, 2023 until the earlier of (i) the closing of the Viveon Merger (ii) to January 2, 2024 (90 days from the date of the forbearance), (iii) the date that Clearday, Inc. or any of its subsidiaries makes an assignment for the benefit of creditors, or applies for or consents to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed. or (iv) the date that bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against Clearday, Inc. or any of its subsidiaries (the earlier of the aforementioned (i), (ii), (iii) or (iv) shall be referred to herein as the “Waiver Expiration Date”). Jefferson Street Capital LLC granted a forbearance to October 31, 2023, but as of the date of this Report has not exercised additional legal measures towards enforcement of payment of the debt. The Company is working on a longer-term solution. However, there can be no assurance that we will be able to extend any the forbearances with any of these lenders on acceptable terms or at all or that we will be able to comply with the terms of the forbearance provided by Mast Hill LP which includes that Clearday provide net proceeds from additional financings by Clearday under the terms of the promissory notes with such lender, unless such payment is excused by such lender. |
| * | |
| ** | |
| *** |
| 16 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Equity Secure Fund I, LLC Modification
As
of September 5, 2023, AIU 8800 Village Drive, LLC, the subsidiary of Clearday, Inc. that owns the property in San Antonio, Texas used
for our headquarters and production facilities, extended, modified and rearranged the mortgage financing of such property, to extend
the maturity to
Bridge Financings.
The
Company has issued Senior Convertible Notes (“Bridge Notes”) during 2023. The Company is continuing such offerings of Bridge
Notes of an amount of up to $
Invesque Obligations Amendment
Clearday and certain of its subsidiaries
entered into the LTA Second Amendment effective December 15, 2023. Among other matters, the LTA Second Amendment deferred the due
date for the initial Down Payment to December 31, 2023, and increased such amount payable from $
AGP Contract and Note Amendment
Clearday entered into a Promissory Note and
Second Amendment (“AGP Second Amended Note”), effective December 31, 2023, that amends Clearday’s obligations
under the Promissory Note and Amendment (the “AGP First Amended Note”) dated July 6, 2022 of the initial principal
amount of $
7. Commitments and Contingencies
Contingencies
Simpsonville litigation
Simpsonville
Action 1 - The tenant, MCA Simpsonville Operating Company LLC, (“Tenant”), of the MCA community located in
Simpsonville, South Carolina, (the “Simpsonville Facility”), and other affiliates of the Company have a dispute with the
landlord of the Simpsonville Facility MC-Simpsonville, SC-UT, LLC, (the “Landlord”), and its affiliates – the
Embree Group of Companies collectively (“Embree”) under the terms of the lease. After non-payment, the Landlord
instituted litigation (“Simpsonville Action 1”). The trial court issued a judgment in this litigation and assessed
damages of $
| 17 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Simpsonville
Action 2 - The Landlord filed a second action on April 9, 2021 (“Simpsonville Action 2”), for claims similar to
Simpsonville Action 1 including relief for payment of past due rent and reimbursement of taxes from October 2020 to the time of the
trial in this action. The court granted a final judgment in this matter in favor of the Landlord on April 14, 2023, and assessed damages of $
Under
the structure used for the lease and operations of the Simpsonville Facility, Tenant is the direct obligor under the lease and another
subsidiary of Clearday, Trident, is a guarantor of the lease obligations. Neither Tenant nor Trident have any material assets. We are
assessing the exposure of these matters to Clearday, Inc. under these actions, including any liability under indemnification agreements
with the individual guarantors. We attempted to negotiate a settlement of the summary judgement; however, such negotiations were not
successful. At September 30, 2023, the total outstanding amount owed for Simpsonville Action 2 including post judgement interest is $
Employment related taxes
Certain
subsidiaries of the Company that operate hotel assets did not pay employment related taxes such as required withholdings for Texas State
unemployment taxes and federal income tax and employee and employer contributions for FICA (Social Security and Medicare) taxes, and
federal unemployment tax for certain periods from December 31, 2018, to December 31, 2021. These subsidiaries have since made the appropriate
filings with the Internal Revenue Service and the Company has accrued the full estimated amount of the underpaid taxes as well as the
estimated penalties and interest. As of September 30, 2023, the amount of the estimated taxes, penalties, and interest, assuming that
there is no waiver or mitigation of the penalties, is $
Certain
subsidiaries of the Company that operate its residential care communities have not paid employment related taxes such as required
withholdings for federal income tax and employee and employer contributions for FICA (Social Security and Medicare) taxes, and
federal and state unemployment tax from and after the payroll periods that ended September 16, 2022, to the date of this Report.
These subsidiaries have since made the appropriate filings with the Internal Revenue Service and the Company has recorded the amount
of the underpayment of approximately $
Payroll related taxes
In
the fourth quarter of 2021, certain subsidiaries of the Company did not remit payroll taxes related to the Earned Retentions Tax
Credit (“ERTC”). The ERTC program permitted an offset for such obligations and was terminated during the fourth quarter
with an effective termination date of September 30, 2021. As a result, the Company has recorded $
| 18 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Merchant advance loans
Certain
subsidiaries of the Company that operate residential care facilities (“MCA Borrowers”) incurred certain financings through
merchant credit advances. Such financings were provided by creditors under agreements (“MCA Agreements”) that describe the
transaction as the sale of future receivables by the applicable MCA Borrower. The aggregate accrued amount of these financings is approximately
$
These actions are:
| 1. | Premium Merchant Funding 18, LLC v Memory Care at Good Shepherd LLC and James Walesa (a guarantor), filed in state court in Kings County, New York on August 19, 2022 (summary judgement in this matter was entered in favor of the plaintiff and such judgement was not appealed by us); | |
| 2. | Libertas Funding LLC v. Memory Care at Good Shepherd, LLC, et. al. including James Walesa (a guarantor), filed in state court in Monroe County, New York on August 24, 2022 (summary judgement in this matter was entered in favor of the Company’s subsidiary and such judgement was not appealed by us, and this judgement was entered in the State of Texas); | |
| 3. | Cloudfund LLC v MCA New Braunfels Operating Company LLC et. al. including James Walesa (a guarantor), filed in state court in Nassau County, New York on August 29, 2022; | |
| 4. | Cloudfund LLC v MCA Naples Operating Company, LLC and James Walesa (a guarantor), filed in state court in Nassau County, New York on August 30, 2022 (summary judgement in this matter was entered in favor of the plaintiff and such judgement was not appealed); | |
| 5. | Swift Funding Source Inc. v MCA Naples Operating Company LLC et. al. including Christin Hemmens (a guarantor), filed in state court in Ontario County, New York on August 31, 2022; | |
| 6. | PIRS Capital, LLC v MCA Westover Hills Operating Company, LLC et. al. including James Walesa (a guarantor), filed in state court in New York County, New York on September 8, 2022 (this action was discontinued without prejudice on October 25, 2023); | |
| 7. | Prosperum Capital Partners, LLC dba Arsenal Funding v MCA Westover Hills Operating Company LLC et. al. including James Walesa (a guarantor), filed in state court in Kings County, New York on September 28, 2022; | |
| 8. | Fox Capital Group, Inc. v MCA Westover Hills Operating Company LLC et. al. including James Walesa (a guarantor), filed in state court in Bexar County, Texas on October 25, 2022. |
James Walesa is the Company’s Chief Executive Officer, Christin Hemmens is the Company’s VP of Education. Other than as set forth above, each of these actions are in the pleading or discovery stage of litigation.
Naples
Equity Loan: The mortgage lender for the Naples, Florida facility commenced an action for nonpayment of the mortgage note (the “Benworth
Action”). This litigation arises from the nonpayment under the mortgage and promissory note. The Benworth Action demands payment
of the principal amount of the promissory note of $
The
Company has been threatened with litigation by the law firm Rigrodsky Law, P.A. alleging unjust enrichment in connection with stockholder
litigation commenced by such firm related to the AIU Merger and claiming damages of $
| 19 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In addition, from time to time, the Company becomes involved in litigation matters in the ordinary course of its business. Such litigations include nonpayment of accounts payable. 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 who are related
parties. 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 four of its five MCA facilities, including the lease of the MCA community for
the Simpsonville Facility. This is the facility that is the subject of litigation and judgement against certain of the Company’s
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 is to receive 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 Series A Preferred at $ per unit, for the amount of such payment.
| 20 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basic net income (loss) per common share is calculated by dividing the net income (loss) attributable to Clearday shareholders 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 Clearday shareholders 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.
Following is the Company’s earnings per share calculation included in the condensed consolidated statements of operation,
| Nine Months | Three Months | |||||||
| 9/30/2023 | ||||||||
| Basic and diluted loss per share attributable to Clearday, Inc. | ||||||||
| Net Income (loss) | ( | ) | ( | ) | ||||
| Preferred stock dividends | ( | ) | ( | ) | ||||
| Net (loss) attributable to common shareholders | ( | ) | ( | ) | ||||
| Net (loss) attributable to non-controlling interest | ( | ) | ( | ) | ||||
| Net loss available to Clearday shareholders | ( | ) | ( | ) | ||||
| Earnings ( loss) per share attributable to Clearday, Inc. | ||||||||
| Basic | ) | ) | ||||||
| Diluted | ||||||||
| Weighted average common shares outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| For the Nine Months Ended | ||||||||
| Dilution shares calculation | September 30, | |||||||
| 2023 | 2022 | |||||||
| Series A Convertible Preferred Stock | ||||||||
| Series F 6.75% Convertible Preferred Stock | ||||||||
| Series I 10.25% Convertible Preferred Stock | ||||||||
| Limited Partnership Units | ||||||||
| Warrants | ||||||||
| Bridge Notes | ||||||||
| Total participating securities | ||||||||
| 21 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Related Party Transactions
Debt and Guarantees
The
Company’s indebtedness includes amounts loaned to us by executive management. In addition, the Company incurs debt that is
personally guaranteed by certain executives, officers and directors for which they receive a guarantee fee. There is a guarantee fee
agreement in place that details the amount of the fee as well as payment terms. The amount of the fee is capped at
We
owe (1) Richard Morris, our General Counsel, (i) for a loan in the amount of $
Cibolo
Creek Partners, LLC (“Cibolo Creek”) and its affiliate Round Rock Development Partners, LP (“RRDP”) prior to
December 31, 2018, 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 specified by such lender. In December 2018, AIU acquired businesses affiliated with Cibolo Creek. As
of September 30, 2023, AIU Sixth Street, Cibolo Creek and Round Rock were owed $
During
the first two quarters of 2023 we used the services of Galleros Robinson, LLP, a CPA and advisory firm, for certain accounting
services. Richard Levychin is a partner of this firm and member of our audit committee. We had accounts payable in the amount of
$
Thinktiv
Clearday
has engaged Thinktiv, Inc. to provide services under the terms of a previously reported Services Agreement dated as of March 6, 2019,
by and between Thinktiv, Inc. and Clearday Operations, Inc. During the third quarter of 2023 we incurred approximately $
Stockdale Financing.
On
May 22, 2023, Stockdale Associates, Ltd. (“Stockdale”), a wholly owned subsidiary of Clearday, Inc. entered into a sales
transaction with James Walesa, the Chief Executive Officer of the Company, for land of approximately
Viveon Merger
We
have agreed to invest approximately
10. Equity (Deficit)
Accumulated Deficit
As
of September 30, 2023, we have an accumulated deficit of $
Preferred Stock
The Company has authorized shares of Preferred Stock at a par value of $.
The
Company has authorized shares of Series A Convertible Preferred Stock at a par value of $, of which shares were
issued and outstanding at September 30, 2023, and December 31, 2022. Except for a preference on liquidation of $
Common Stock
The Company has authorized shares of Common Stock with a par value of $ per share. At September 30, 2023 and December 31, 2022 there were and shares issued and outstanding, respectively.
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 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.
| 22 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Rights and Preferences - Holders of common stock have no preemptive, conversion or subscription rights, and there is no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock, which the Company may designate and issue in the future.
Voting
Rights -
Subject to supermajority votes for some matters, matters shall be decided by the affirmative vote of the Company’s stockholders having a majority in voting power of the votes cast by the stockholders present or represented and voting on such matter, provided that the holders of the Company’s common stock are not allowed to vote on any amendment to the Company’s certificate of incorporation that relates solely to the terms of one or more series of preferred stock if the holders of such affected series are entitled, either separately or together with the holders or one or more such series, to approve such amendment. The affirmative vote of the holders of at least 75% of the votes that all of the Company’s stockholders would be entitled to cast in any annual election of directors and, in some cases, the affirmative vote of a majority of minority stockholders entitled to vote in any annual election of directors are required to amend or repeal the Company’s bylaws, amend or repeal certain provisions of the Company’s certificate of incorporation, approve certain transactions with certain affiliates, or approve the sale or liquidation of the Company. The vote of most minority stockholders applies when an individual or entity and its affiliates or associates together own more than 50% of the voting power of the Company’s then outstanding capital stock.
Restricted Stock - During the third quarter of 2023, we did not issue any shares of our common stock to consultants.
Registered Shares - During the third quarter of 2023, we issued approximately shares of common stock upon the conversion of our Series F Preferred stock. Such shares were registered under our prior registration statement.
Stock Options - On September 30, 2023, we continued to have the two active equity award option plans, the 2003 Equity Incentive Plan and the 2013 Equity Incentive Plan (collectively, the “Stock Option Plan”). Although we can only grant new options under the 2013 Equity Incentive Plan. Under our Stock Option Plan, stock awards were made to our former directors, key employees, consultants, and non-employee directors and consisted of stock options, restricted stock awards, performance awards, and performance share awards. Stock options were granted at prices no less than the market value on the date of grant. There were no stock options that were exercisable on September 30, 2023, and there were no stock options exercised during the nine and twelve months ended September 30, 2023, or December 31, 2022.
Stock Compensation - At September 30, 2023, there was no unamortized stock compensation.
| 23 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Warrants
The Company has three separate types of warrants that are outstanding:
| ● | warrants that were granted and outstanding by Superconductor Technologies Inc. (“STI”) prior to the September 9, 2021, effective date of the previously disclosed merger with Allied Integral United, Inc (“AIU” the “AIU Merger”).; | |
| ● | warrants assumed by the Company that were granted by AIU prior to the effective date of the AIU Merger; and | |
| ● | warrants that were issued by the Company after the AIU Merger. |
The following is a summary of such outstanding warrants at September 30 2023:
Warrants (“STI Warrants”) issued by STI prior to September 9, 2021, the effective date of the AIU Merger.
| Common Shares | ||||||||||||||
| Total | Currently Exercisable | Exercise Price per Share | Expiration Date | |||||||||||
| Warrants related to May 2019 financing | $ | |||||||||||||
| Warrants related to October 2019 financing | $ | |||||||||||||
| Warrants related to October 2019 financing | $ | |||||||||||||
Warrants that were issued by Clearday Operations, Inc. prior to the effective date of the AIU Merger:
| Common Shares | ||||||||||||||
| Total | Currently Exercisable | Exercise Price per Share | Expiration Date | |||||||||||
| Warrants issued in connection with financings * | $ | |||||||||||||
| Warrants issued to a consultant ^ | $ | |||||||||||||
| * | ||
| ^ |
| 24 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Warrants issued by Clearday, Inc. to Lenders after the effective date of the AIU Merger:
Each of the following warrants (“Lender Remedy Warrants”) were issued in connection with a financing arrangement and provides that the warrant may only be issued upon an event of default under the related promissory note.
| Common Shares | ||||||||||||||
| Outstanding | Exercisable | Exercise Price | Maturity Date | |||||||||||
| Related to the January 12, 2023, Financing (Mast Hill LP) | $ | * | ||||||||||||
| Related to the September 30, 2022, Financing (Mast Hill LP) | $ | * | ||||||||||||
| Related to the July 1, 2022, Financing (Mast Hill LP) | $ | * | ||||||||||||
| * |
The additional warrants were also issued to lenders:
| Common Shares | ||||||||||||||
| Related to the February 17, 2023, Financing (Jefferson Street Capital LLC) | $ | |||||||||||||
| Related to the January 12, 2023, Financing (Mast Hill LP) | $ | |||||||||||||
Derivative Calculation
During the period ended September 30, 2023, the Company calculated the fair value of the warrants outstanding based on assumptions used in the Cox-Ross-Rubinstein binomial pricing model using the following inputs: the price of the Company’s common stock on the date of issuance ranging from $ to $; risk-free interest rates ranging from % to .%; volatility ranging from % to % based on the historical volatility of the Company’s common stock; exercise prices ranging from $ to $; and terms of sixty months.
| 25 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Non-Controlling Interest
In
November 2019, a certificate of incorporation was entered into by AIU Alt Care for Series I
In
October 2019, AIU Alt Care formed AIU Impact Management, LLC and they formed Clearday OZ Fund, which is managed by AIU Impact Management,
LLC, as the general partner. For the three months ended September 30, 2023, and 2022, there was
The
exchange rate for each of the Alt Care Preferred Stock and the limited partnership units in Clearday OZ Fund to Clearday, Inc.
Non-Controlling Interest Loss Allocation
The Company applied ASC 810-10 guidance to correctly allocate the percentage of loss attributable to the NCI of each company. For the period ended September 30, 2023, and 2022 the loss for AIU Alt Care is as follows:
| Net Loss | Net Loss Attributable to NCI | |||||||||||||||
| Nine months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| AIU Alt Care | ( | ) | ( | ) | ||||||||||||
| Clearday OZ Fund | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Cumulative Convertible Preferred Stock and Limited Partnership Interests in Subsidiaries (NCI)
At September 30, 2023, shares of AIU Alt Care Preferred Stock were outstanding and units of Clearday OZ LP Interests were outstanding. For the nine months ended September 30, 2023, no additional shares of AIU Alt Care Preferred Stock or Clearday OZ LP Interests were issued.
The
terms and conditions of the Alt Care Preferred Stock and the Clearday OZ LP Interests allow the investors in such interests to exchange
such securities into the Company’s common stock at the conversion price equal to
Dividends
on the Alt Care Preferred Stock and preferred distributions on the units of limited partnership interests in Clearday OZ Fund are at
each calendar quarterly month end at the applicable dividend rate (
| 26 |
CLEARDAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Each of the Company, AIU Alt Care and Clearday OZ Fund shall redeem the Alt Care Preferred Stock or the units of limited partnership interests on the 10 Year Redemption Date that is ten years after the final closing of the offering. The securities provide for a redemption in cash or shares of common stock at the option of Clearday, Inc., in an amount equal to the unreturned investment in the Alt Care Preferred Stock or units of limited partnership interests. Upon consummation of certain equity offerings prior to May 1, 2022, AIU Alt Care may, at its option, redeem all or a part of the Alt Care Preferred Stock for the liquidation preference plus a make-whole premium. In addition, upon the occurrence of, among other things (i) any change of control, (ii) a liquidation, dissolution, or winding up, (iii) certain insolvency events, or (iv) certain asset sales, each holder may require the Company to redeem for cash all such holder’s then outstanding shares of Alt Care Preferred Stock.
The Certificate of Designation also sets forth certain limitations on the Company’s ability to declare or make certain dividends and distributions and engage in certain reorganizations. The limited partnership agreement has similar provisions.
Subject to certain exceptions, the holders of Alt Care Preferred Stock and the units of limited partnership interests have no voting power and no right to vote on any matter at any time, either as a separate series or class or together with any other series or class of shares of capital stock or partnership interests, and are not be entitled to call a meeting of such holders for any purpose, nor are they entitled to participate in any meeting of the holders of the Company’s common stock or participate in the management of Clearday OZ Fund by its general partner.
11. Mezzanine Equity
The
Company has authorized shares of Series F
Pursuant to the Certificate of Designations of Series F Convertible Preferred Stock, upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation (“Liquidation Event”), including any Deemed Liquidation Event, as defined in the Certificate of Designations and unless otherwise determined by the majority of the holders of the Series F Convertible Preferred Stock that a transaction is not a Deemed Liquidation Event, the holders of then outstanding Series F Convertible Preferred Stock shall be entitled to be paid a liquidation preference (“Preference Amount”) out of the assets of the Company available for distribution to its stockholders equal to the original issue price plus any accumulated and unpaid dividends. As the payment of this Preference Amount is not solely within the control of the Company, the Series F Convertible Preferred Stock does not qualify as permanent equity and has been classified as mezzanine equity. The Series F Convertible Preferred Stock is not redeemable, and it was not probable that there would be a Liquidation Event as of September 30, 2023. Therefore, the Company is not currently required to accrete the Series F Convertible Preferred Stock to the aggregate liquidation value.
Dividends and Distributions
For
the nine-months ended September 30, 2023, and 2022, the Company accrued dividends for the
12. Subsequent Events
We evaluated subsequent events and transactions occurring after September 30, 2023, through the date of this Report to determine if there were any such events or transactions requiring adjustment to or disclosure in the accompanying condensed consolidated financial statements, noting none other than the following.
Leander Property Sale
Stearns
Bank National Association (the “Mortgage Lender”), for the property (“Leander Property”) owned by Leander
Associates, Ltd., (“Leander”), a Texas limited partnership that is a consolidated subsidiary of Clearday, Inc., has
commenced litigation regarding the nonpayment of a mortgage loan obligations of approximately $
Extinguishment of Indebtedness - Merchant advance loans
PIRS
Capital, LLC, a financing party, commenced legal actions (PIRS Capital LLC v MCA Westover Hills Operating Company, LLC et. al. including
James Walesa (a guarantor), filed in state court in New York County, New York on September 8, 2022) alleging, among other matters, a
breach of the MCA Agreement for non-payment and a breach of the guaranty by the applicable guarantors. However, this action was discontinued
without prejudice on October 25, 2023. PIRS Capital, LLC has dismissed its lawsuit and the related indebtedness in the amount of $
Additional Financings
Bridge
Financings - Through December 8, 2023, we incurred additional financings of a gross amount of $
Modification of Indebtedness
The Company modified the indebtedness owed to Invesque and to AGP as summarized in Note 6 - Indebtedness.
| 27 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Report. Some of the information contained in this discussion and analysis, including information with respect TO Clearday, its plans, and strategy for its business and related financing, includes forward-looking statements that involve risks and uncertainties.
Overview
We provide technologies and innovative care solutions to address the global aging crises. We have used our extensive experience in senior care, including owning and operating high-performing residential care facilities in the most challenging senior care venues (Memory and Alzheimer’s treatment), to develop our purpose-built longevity-tech platform for the estimated 170 million Americans turning 50 by 2030. Our longevity-tech platform intentionally moves our focus from a facility-driven real estate business to a healthcare technologies business that is designed to capture the massive unmet senior care need. We believe that the currently available longevity-tech solutions do not address this significant market and that we are able to modernize the nearly 54,000 U.S. daily care, skilled nursing, and long-term care facilities.
During the first nine months of 2023, we:
| ● | entered into a merger agreement with Viveon Health Acquisition Corp., a Delaware corporation (“Viveon” “Viveon Merger Agreement”), that is a special purpose acquisition corporation (“SPAC”) that has its shares of common stock listed on the New York Stock Exchange (“NYSE”), and amended the Viveon Merger Agreement that increased our valuation for the Viveon Merger; | |
| ● | exited from three of our four residential care facilities and limited our financial investment in the capital-intensive residential memory care businesses by terminating our leases in these three facilities that were operated through our Memory Care America LLC subsidiary (“MCA”, “MCA Facilities”. “MCA Facility Leases”); and | |
| ● | Worked to expand our Adult Day Care business. |
The termination of the MCA Facility Leases has improved our financial operations and cash flows, primarily by reducing our operating losses and debt that was required to fund such losses.
Seasonality
Residential care facilities are seasonal in nature. Generally, the Naples residential care facility suffers revenue losses in summer months as some families of residents temporarily move to Northern areas and bring their resident family members with them; and during the winter months as there is often an increase in the loss of residents during these periods primarily because of flu and other health issues during such periods. We do not expect our longevity-tech platform businesses to have such seasonality.
Results of Operations
Prior to exiting three of our four MCA Facilities on March 31, 2023, our operating revenues were predominately from our MCA Facilities and adult day care center. After March 31, 2023, our operating revenues were primarily from our Naples residential care community (“Naples Community”) and our San Antonio Adult Daycare center. Our Naples Community earns revenue from its communities primarily by providing services to individual residents for a specified monthly fee, which fee includes all services such as room, meals, programs, respite care, and to a lesser extent, certain community fees for a resident to move into a facility. All of the revenues from our Naples Community are “private pay” which are charged directly to the resident and paid by such individual’s family or administrator. Residents may terminate services upon advance notice of a specified period. A portion of our revenues were from our adult day care business. Our adult day care service earns revenues primarily by providing services to individual clients for weekday sessions, which includes activities. Revenues from our adult day care service include private pay customers, but primarily include payments made to us through an adult day program sponsored by the United States Department of Veterans Affairs (VA) on behalf of veterans who qualify.
| 28 |
Our operating expenses are primarily the expenses of our Naples Community, adult day care and our Longevity-Tech Platform. Expenses incurred by our Naples Community are primarily wages and benefits, wage-related expenses; operating expenses, including utilities, housekeeping, dietary, maintenance, regulatory requirements, insurance and administrative costs and salaries; lease expenses which ended effective March 31, 2023; other general and administrative expenses; depreciation and amortization expense on buildings and furniture and equipment; and interest expenses for loans and other financings related to our Naples residential care community and the other communities we held prior to March 31, 2023.
Operating Summary for the Three-Months Ended September 30, 2023, and 2022
Revenues. Revenues decreased by approximately 73% or $2.2 million to approximately $0.8 million during the quarter ended September 30, 2023, from approximately $3.1 million during the quarter ended September 30, 2022, primarily due to lower revenues reflecting the Community Leases that we terminated effective March 31, 2023, offset by an increase of revenues during such period from our adult day care center of approximately 186% or approximately $0.1 million to approximately $0.2 million, offset to a smaller extent, decreased commercial property rental income during this period due to the sale or other disposition of commercial properties. During the second quarter of 2023, we significantly increased the daily rate charged at our adult day care community due in large part to the deployment of our longevity-tech platform and accepting clients that require greater attention and care. In the third quarter of 2023, we deployed our longevity-tech platform at our Naples memory care community and began to increase rates at that community which we expect will enable better operating results in future periods.
Operating Expense. Operating expenses decreased by approximately 57% or approximately $3.5 million to approximately $2.6 million during the quarter ended September 30, 2023 due to (1) lower wages and general operating expenses of approximately 88% or approximately $3.8 million resulting primarily from lower employee wages and related expenses related to the reduction of resident care staff at the terminated Community Leases, offset in part by increased wages and related expenses due to an increase in executives and staff developing and marketing our Longevity-Tech Platform, and (2) lower selling, general and administrative expense of approximately 47% or approximately $0.7 million resulting primarily from changes in personnel reflecting our pivot to a longevity technology company and reduced professional and consulting fees and (3) approximately $0.3 million decrease of accrued expenses due to an adjustment related to certain contingencies. These decreases were offset by (1) a $0.7 million increase in expenses incurred by us for corporate strategy and strategic marketing including corporate narrative and brand development as well as the review of strategic partner opportunities as described in Note 9 to the financial statements included in this Report; (2) a $0.2 million or 169% increase in insurance expense; 3) a $0.3 million increase in bad debt expense related to the full reserve of a receivable recorded for reimbursement of expenses whose collectability is uncertain.
Operating loss. We reduced our net operating loss by approximately 42% or approximately $1.3 million during the quarter ended September 30, 2023, compared to the quarter ended September 30, 2022, primarily by reducing our total operating expenses offset by a decrease in total revenues, discussed above.
Other (income) Expenses. Other income decreased (other expense increased) during the third quarter of 2023, to approximately $1.3 million of other expenses from approximately $2.4 million of other income. This is an approximate $3.7 million or 154% increase in other expenses (decrease in other income). This change is primarily related to a 44% increase in interest expense because we incurred a higher interest rate for defaulting on our indebtedness, a $0.7 million increase in loss on debt impairment for the reserve of the Viveon Note, a $1.6 million decrease in gain on extinguishment of debt as no gain was recognized in the third quarter of 2023, and a $1.9 million increase in other expense (decrease in other income). These items are further discussed below.
Interest expense. Interest expenses increased by approximately 44% or approximately $0.5 million to approximately $1.5 million during the quarter ended September 30, 2023, from $1.0 million during the quarter ended September 30, 2022. The increase in interest expense resulted from higher interest rates charged, including default interest rates and other fees and expenses arising from defaults, primarily the Bentworth Action and, to a smaller extent, the mortgage loan on the Leander Property and a greater interest rate related to the mortgage on our headquarters property. The amount of interest expense does not include any accrual of interest for unpaid interest under the MCA Agreements, each of which are not being paid by us. See Item 3 Legal Proceedings.
Fair value of derivatives. In the third quarter of 2023 we recognized an approximate $1.0 million gain arising from the fair value of derivate liabilities. We expect our gains or losses arising from derivative liabilities to increase or decrease as we continue to raise capital through issuing additional Bridge Notes. We did not recognize any gains or losses from derivative liabilities in the third quarter of September 2022.
| 29 |
Gain on debt extinguishment. We did not extinguish any debt in the third quarter of ended September 2023. However, during the three months ended September 2022 we recognized a gain of approximately $1.6 million after we extinguished some of our debt.
Loss on impairment of debt. During the three months ended September 2023, we recognized an approximate $0.7 million loss on impairment of debt arising from our fundings to Viveon through the Bridge Notes described in Part I, Item 1, Note 9- Related Party Transactions. We did not impair any debt in the third quarter of September 2022.
Other (income) Expenses. Other income decreased (other expenses increased) by approximately $1.9 million or 107% in the third quarter of 2023 compared to the third quarter in 2022 to $0.1 million of other expenses in 2023 from of $1.8 million of other income in 2022. These changes were due to various miscellaneous entries made to adjust and correct accounting balances.
Operating Summary for the Nine Months Ending September 30, 2023, and 2022
Revenues. Revenues decreased by approximately 53% or $4.9 million to approximately $4.5 million during the nine months ended September 30, 2023, from approximately $9.4 million during the same period ending September 30, 2022, primarily due to lower revenues from the Community Leases that we terminated effective March 31, 2023, offset by an increase of revenues during such period from our adult day care center and, to a smaller extent, increased commercial property rental income during this period. The decrease was less of a percentage during the nine-month period compared to the three-month period ended September 30, 2023, primarily because we operated the Community Leases for one third of this nine-month period. During the second quarter of 2023 we significantly increased the daily rate charged at our adult day care community due in large part to the deployment of our longevity-tech platform and accepting clients that require greater attention and care. In the beginning in the second and continuing in to the third quarter of 2023, we also deployed our longevity-tech platform at our Naples memory care community and began to increase rates at that community which we expect will enable better operating results in future periods.
Operating Expenses. Operating expenses decreased by approximately 46% or approximately $8.2 million to approximately $10.0 million during the nine months ended September 30, 2023, from approximately $18 million during the same period ended September 30, 2022, primarily due to (1) lower wages and general operating expenses of approximately 61% or approximately $8.1 million resulting primarily from lower employee wages and related expenses related to the reduction of resident care staff at the terminated Community Leases offset in part by increased wages and related expenses due to an increase in executives and staff developing and marketing our Longevity-Tech Platform; (2) lower selling, general and administrative expenses of $0.7 million or 22%; (3) lower healthcare insurance expense of approximately 54% or approximately $0.6 million resulting primarily from changes in personnel reflecting our pivot to a longevity technology company and reduced professional and consulting fees and (4) approximately $0.3 million decrease of accrued expenses due to an adjustment related to certain contingencies. These decreases were offset by (1) a $0.7 million increase in expenses incurred by us for corporate strategy and strategic marketing including corporate narrative and brand development as well as the review of strategic partner opportunities as described in Note 9 to the financial statements included in this Report; (2) a $0.5 million increase in bad debt expense primarily related to the full reserve of a receivable recorded for reimbursement of expenses whose collectability is uncertain; and (3) a $0.2 million or 37% increase in depreciation and amortization expenses primarily due to amortization being recorded for part of our Longevity Tech Platform being placed into service at the beginning of 2023.
Operating loss. We reduced our net operating loss by approximately 39% or approximately $3.3 million during the nine months ended September 30, 2023, compared to the same period ended September 30, 2022, primarily by reducing our total operating expenses offset by a decrease in total revenues of discussed above.
Other (income) Expenses. Other income decreased (other expenses increased) during the nine months ended September 30, 2023, to approximately $2.9 million of other expenses from approximately $2.9 million of other income or approximately 198% This $5.8 million decrease in other income (or increase in other expenses) is due to the explanations below.
Interest expense. Interest expenses increased to $3.9 million during the nine months ended September 30, 2023, from $1.9 million during the same period ended September 30, 2022, or approximately $2.0 million or 103%. Interest expense during the nine months ended September 30, 2023, was primarily related to debt incurred, including the note payable to Invesque on March 31, 2023, and higher interest rates charged, including default interest rates and other fees and expenses arising from defaults, primarily the Benworth Action and, to a smaller extent, the mortgage loan on the Leander Property and a greater interest rate related to the mortgage on our headquarters property. The amount of interest expense does not include any accrual for unpaid interest under the MCA Agreements, each of which are not being paid by us. See Item 3 Legal Proceedings.
PPP loan forgiveness. We recognized income or a gain of approximately $1.0 million when our PPP loan was forgiven during the nine months ended September 30, 2022. There was no such amount recognized in the nine months ended September 30, 2023, thus contributing to the period over period decline in other income.
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Derivative financing costs. Derivative financing costs including the fair value of derivatives of approximately $1.1 million, net expense contributed to the increase in other expenses. These same expenses were not recognized in 2022,
(Gain) loss on debt extinguishment. For the nine months ended September 30, 2023, we recognized a loss on extinguishment of debt of approximately $0.7 million compared to us recognizing a gain on debt extinguishment of $1.6 million. This contributed approximately $2.3 million or 140% to the increase in other expenses or decline in other income.
Loss on impairment of debt. During the nine months ended September 30, 2023, we recognized $1.0 million of expenses related to the impairment of debt arising from our fundings to Viveon through the Bridge Notes described in Part I, Item 1, Note 9 - Related Party Transactions. No such impairment was applicable in the nine months ended September 30, 2022. This contributed to the increase in other expenses or decline in other income.
Gain on Termination of lease. During the nine months ended September 30, 2023, we recognized a $4.3 million gain related to the termination of lease obligations related to our Community Leases that were terminated in March of 2023. This entire amount was an increase in other income and offset the overall increase in other expenses or decline in other income for the 2023 versus 2022 nine-month comparison.
Other (income) Expenses. Other income decreased (other expenses increased) during the nine months ended September 30, 2023, to approximately $0.4 million of other expenses from approximately $2.2 million of other income or approximately 119%. This $2.6 million decrease in other income (or increase in other expenses) is due to various miscellaneous entries made to adjust and correct accounting balances.
Government Programs
We participated in and therefore expect additional cash payments under the Employee Retention Tax Credit (“ERTC”) program. We have applied for payments under the Families First Coronavirus Response Act (the “FFCRA”), as amended by the COVID-related Tax Relief Act of 2020 and expect to utilize the federal tax credits available under the federal Work Opportunity Tax Credit (WOTC). The amount of savings under WOTC is subject to the hiring of workers from certain disadvantaged targeted categories and is generally calculated as a percentage of wages over a twelve-month period up to worker maximum by targeted category. We did not have any PPP Loan Forgiveness in the nine months ended September 30, 2023, compared to approximately $1 million of PPP Loan Forgiveness received in the nine months ended September 30, 2022.
Contractual Obligations and Commitments
See the “Commitment and Contingencies” section within Note 7 — Commitments and Contingencies of the condensed consolidated financial statements within this Report, which information is incorporated herein by reference.
We entered into the Lease Transition Agreement to terminate the Community Leases as described in Note 5 — Leases. We amended this agreement on September 8, 2023, effective July 31, 2023. This agreement required us to pay an approximate total of $3.5 million of which $300,000 was payable on July 31, 2023. We paid $50,000 of this amount on July 31, 2023, and under the amendment were required to pay the remaining $250,000 on September 30, 2023. The Lease Transition Agreement has been amended as described in Note 6 - Indebtedness. Our obligations under this agreement are in default as of January 2, 2024. We expect to continue to negotiate a further extension of the payment dates for such obligations. There can be no assurance that any such negotiations will conclude with an amendment or extension of terms that are acceptable or at all.
Legal Proceedings
Clearday is subject to legal proceedings. The disclosures in this part of Management’s Discussion and Analysis of Financial Condition and Results of Operations are provided under Item 1 Note 7 — Commitments and Contingencies to the financial statements – Commitments and Contingencies.
Off-Balance Sheet Arrangements
None.
Liquidity and Capital Resources
Cash, consisting of short-term, highly liquid investments and money market funds with original maturities of nine months or less at the date of purchase, are carried at cost plus accrued interest, which approximates market.
We had no restricted cash at September 30, 2023. Restricted cash at December 31, 2022, included cash that Clearday deposited as security for obligations arising from property taxes, property insurance and replacement reserve Clearday is required to establish escrows as required by Clearday’s mortgages and certain resident security deposits.
We have continued to sustain significant operating losses and have used cash raised from issuing securities and debt, including convertible debt, to fund such losses. We expect to continue to incur losses until we can realize revenues from our longevity-tech platform. However, we expect to have lower operating losses going forward primarily because of the termination of the Community Leases under the Lease Transition Agreement, offset in part by our incurrence of expenses incurred by us for corporate strategy and strategic marketing including corporate narrative and brand development as well as the review of strategic partner opportunities as described in Note 9 to the financial statements included in this Report.
Our existing liquidity will likely not be sufficient to fund our operations, including payroll, anticipated capital expenditures, working capital, and other financing requirements for the foreseeable future. We may require more financing than anticipated, especially if our planned sales or revenues of our longevity-tech platform are delayed or the closing of the Viveon Merger is further delayed.
We expect our operating working capital needs to be less after the termination of the Community Leases under the Lease Transition Agreement as we will not incur the cash losses incurred in operating these communities, offset in part because of the amounts payable under the Lease Transition Agreement which is funded through a note that we issued to the landlord. The annualized operating loss for the three-month period ended September 30, 2023, was approximately $4.4 million compared to the annual operating loss for 2022 of $11.9 million, an improvement of approximately 63%. Our annualized revenues for the three-month period ended September 30, 2023, was approximately $3.3 million compared to the annual revenues for 2022 of approximately $12.5 million, a decrease of approximately $9.2 million or approximately 73%. The Lease Transition Agreement has been amended as described in Note 6 - Indebtedness. Our obligations under this agreement are in default as of January 2, 2024. We expect to continue to negotiate a further extension of the payment dates for such obligations. There can be no assurance that any such negotiations will conclude with an amendment or extension of terms that are acceptable or at all.
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As discussed in Note 6 — Indebtedness, we have loans and other indebtedness that are in default. The lenders may exercise remedies including the sale of assets in a foreclosure process. We expect to negotiate a deferment of payment obligations with these lenders and a payment plan that may be funded, in part, by the sale of our securities, including the Bridge Financings. There can be no assurance that we will be able to defer such payment obligations on acceptable terms, or at all, or that we will raise sufficient additional funds on acceptable terms, or at all.
We have undertaken certain actions in our Naples residential care community and our San Antonio adult daycare community including increasing rates and expect that will lower our operating working capital deficit. We increased our resident fees in the Naples community in July and expect to continue to increase the rates, in large part, because of the incorporation of the Longevity-Tech Platform. We are planning to open additional adult daycare centers that we believe will generate net operating income, however, our ability to open such additional centers will depend on our ability to raise additional financings. There can be no assurance that any such additional financing will be available on acceptable terms or at all. Additionally, executive management of our Naples residential care community have tendered their resignation during December 2023. We expect to incur additional costs to recruit a new executive team and expect to incur a period of lower resident occupancy until the new management team is onboard and effective, which will likely increase our operating loss at this community during the later part of the fourth quarter of 2023 and during the first quarter of 2024.
We will incur ongoing and recurring expenses associated with professional fees for accounting, audit, legal, and other expenses in connection with filing our annual and quarterly reports on forms 10-K and 10-Q with the Securities and Exchange Commission (“SEC), proxy statements, the Viveon Merger and other filings under the Exchange Act. These obligations will reduce our ability and resources to fund other aspects of our business. We hope to be able to use our status as a public company to increase our ability to use non-cash means of settling obligations and compensate certain independent contractors who provide professional services to us, although there can be no assurances that we will be successful in any of those efforts.
We continue to take actions to close the Viveon Merger and expect that Viveon will be in a position to make the requisite registration statement and proxy filings for the Viveon Merger.
We also have incurred certain bridge financings that are due and payable in January, 2024. We do not expect to have sufficient funds to repay these obligations which will incur additional interest of 2% per month and expect to enter to negotiate with the holders of these obligations an amendment or waiver to extend the maturity date. There can be no assurance that any such negotiations will conclude with an amendment or extension of terms that are acceptable or at all.
Cash Flows from Operating Activities
During the nine-months ended September 30, 2023, and 2022, our operating activities primarily consisted of revenue from our residential and adult daycare communities and payments or accruals for employees and other operating expenses and payment of some of our liabilities.
Cash Flows from Investing Activities
During the nine-months ended September 30, 2023, our investing activities were related to our investment in Viveon which enabled Viveon to pay certain operating and merger related expenses and costs.
Cash Flows from Financing Activities
During the nine-months ended September 30, 2023, and 2022, our financing activities consisted of transactions in which we raised proceeds through the issuance of debt or equity securities. During the nine-months ended September 30, 2023, we raised proceeds primarily from the issuance of debt to institutional lenders and the advances or subscriptions for Bridge Financings in the aggregate amount of $4.3 million, we repaid outstanding indebtedness in the aggregate amount of approximately $1.1 million. Net cash provided by financing activities was $3.1 million for the nine months ended September 30, 2022, which consisted primarily of net proceeds received from Invesque, Bridge financings, and the loans from other corporate and institutional lenders offset by payments of indebtedness.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of the condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if a different judgment or estimate were made, materially affect our reported financial position, results of operations, or cash flows, see Note 2– Critical Accounting Policies and Estimates” in the notes to our condensed consolidated financial statements included in this Report.
During the three months ending September 30, 2023, there were no significant changes in our accounting policies and estimates other than the newly adopted accounting standards that are disclosed in Note 2 — Summary of Significant Accounting Policies to our condensed consolidated financial statements included in this Report.
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Impact of Climate Change
Concerns about climate change have resulted in various treaties, laws and regulations that are intended to limit carbon emissions and address other environmental concerns. These and other laws may cause energy or other costs at The Company’s communities to increase. In the long term, the Company believes any such increased costs will be passed through and paid by the Company’s residents and other customers in higher charges for the Company’s services. However, in the short term, these increased costs, if material in amount, could materially and adversely affect the Company’s financial condition and results of operations.
Some observers believe severe weather in different parts of the world over the last few years is evidence of global climate change. Severe weather has had and may continue to have an adverse effect on certain senior living communities the Company operates. Flooding caused by rising sea levels and severe weather events, including hurricanes, tornadoes and widespread fires may have an adverse effect on the senior living communities the Company operates. The Company mitigates these risks by procuring insurance coverage which the Company believes is adequate to protect us from material damages and losses resulting from the consequences of losses caused by climate change. However, we cannot be sure that our mitigation efforts will be sufficient or that future storms, rising sea levels or other changes that may occur due to future climate change could not have a material adverse effect on the Company’s financial results. The Company’s properties have not experienced any material damage due to significant storms such as unusual freezes in Texas or Florida hurricanes. However, we have experienced increased property insurance rates after certain severe weather events and such increases may continue. Additionally, changes in the severity and frequency of adverse weather arising from climate change may impact our ability to deliver services at our Adult Daycare center due to closings which would reduce our revenues and increase costs during periods of severe weather events due to inability of staff to report to work and other factors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this section.
Item 4. Evaluation of Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of our Chief Executive Officer and acting Chief Financial Officer (our principal executive officer and principal financial officer, respectively), has evaluated its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired controls objectives. Any “material weaknesses” in the Company’s internal controls may arise because of the internal control environment of the Company. Based upon that evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were ineffective. Specifically, the company does not have adequate segregation of duties that adequately restrict user and privileged access to certain financial applications, programs, and data to appropriate company personnel; do not adequately limit access to electronic payment systems for authorized expenditures; and have inadequate cyber controls regarding the protection of our data and restricting data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately. Management has identified these weaknesses and have adopted a program to remediate such weaknesses.
Remediation Plan. The Company has instituted efforts to remediate these concerns and enhance the Company’s internal control environment to remediate these issues by the end of the year. However, any failure to maintain effective controls could result in significant deficiencies or material weaknesses and cause the Company to fail to meet the Company’s periodic reporting obligations or result in material misstatements in the Company’s financial statements. The Company may also be required to incur costs to improve its internal control system and hire additional personnel. This could negatively impact the Company’s results of operations.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as noted below. We increased the number of our financial and accounting staff and remediated or mitigated certain internal control weaknesses such as segregation of duties.
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PART II Other information
Item 1. Legal Proceedings
Information on material developments in our legal proceedings is included in Note 7 — Commitments and Contingencies to our consolidated financial statements included in Part I, Item 1 of this Report.
ITEM 1A. Risk Factors
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this section.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In addition to the issuance of securities described by the Company in a Current Report on Form 8-K, the Company has issued the following shares of our common stock:
| 1. | We issued approximately $1.6 million of Bridge Notes from October 5, 2023, through December 8, 2023, which may be converted into approximately 2,640,014 shares of our common stock, assuming the conversion price of $0.82 per share of common stock, which is subject to adjustment in the event that the Viveon Merger Agreement is terminated or expires. |
Each such issuance was exempt from the registration requirements of the Securities Act of 1933, as amended, under Section 4(a)(2) thereof, as each transaction was a privately negotiated transaction that did not involve any public offering. There was no underwriter or placement agent in any such transaction. There was no cash consideration for any such transaction. The Company received or will receive services from each such purchaser of the shares of common stock.
Item 3. Defaults Upon Senior Securities
Certain subsidiaries of the Company that operate residential care facilities (“MCA Borrowers”) incurred certain financings through merchant credit advances. Such financings were provided by creditors under agreements (“MCA Agreements”) that describe the transaction as the sale of future receivables by the applicable MCA Borrower. The aggregate accrued amount of these financings is approximately $2,925,196, as summarized in Part I, Item 1 Note 6 — Indebtedness. During the first quarter of 2023, the Company assessed its rights under the terms of these MCA Agreements and determined that it had rights and defenses to the continued payments to the creditors. The Company has not made payments on account of these MCA Agreements and, accordingly, these MCA Agreements are considered in default by the creditors. The inclusion of the disclosures in this Item 3 is not an admission that the MCA Borrowers are in default of its obligations under the MCA Agreements.
Defaults of indebtedness are noted in Item 1, Note 6 — Indebtedness which information is incorporated herein by reference.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
| Exhibit No. | Description | |
| 31.1(1) | Certification of the Chief Executive Officer pursuant to Exchange Act Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2(1) | Certification of the Chief Financial Officer pursuant to Exchange Act Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1(1) | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2(1) | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS(2) | Inline XBRL Instance Document | |
| 101.SCH(2) | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL(2) | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF(2) | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB(2) | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE(2) | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |
| (1) | Filed herewith. | |
| (2) | Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under those sections. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.
| CLEARDAY, INC. | |
| Dated: January 12, 2024 | /s/ BJ Parrish |
| BJ Parrish | |
| Acting Chief Financial Officer | |
| /s/ James T. Walesa | |
| James T. Walesa | |
| President and Chief Executive Officer |
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