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 November 18, 2022.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995 for these forward-looking statements. Our forward-looking statements relate to future events or our future performance and include, but are not limited to, statements concerning our business strategy, future commercial revenues, market growth, capital requirements, new product introductions, expansion plans and the adequacy of our funding. Other statements contained in this Report that are not historical facts are also forward-looking statements. We have tried, wherever possible, to identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and other comparable terminology.
We caution investors that any forward-looking statements presented in this Report, or that we may make orally or in writing from time to time, are based on the beliefs of, assumptions made by, and information currently available to, us. Such statements are based on assumptions and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations, and those differences may be material. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include the following:
| ● | Our limited cash and a history of losses; | |
| Our ability to fund our innovative care products and services, including Clearday at Home; | ||
| ● | The impact of any financing activity on the level of our stock price; | |
| ● | The dilutive impact of any issuances of securities to raise capital; | |
| ● | Cost and uncertainty from compliance with environmental regulations and the regulations related to operating assisted living or memory care facilities; | |
| ● | Local, regional, national and international economic conditions and events, and the impact they may have on us and our customers; | |
| ● | Increases in our labor costs or in costs we pay for goods and services; | |
| ● | Increases in tort and insurance liability costs; | |
| ● | Delays or nonpayment of government payments to us; and | |
| ● | Circumstances that adversely affect the ability of older adults or their families to pay for our services, such as economic downturns, weakening investment returns, higher levels of unemployment among our residents or potential residents’ family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics. |
For further discussion of these and other factors see “Risk Factors” in our Annual Report on Form 10-K, as amended and supplemented.
This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report.
| I |
Clearday, Inc.
September 30, 2022
Table of Contents
References in this Report to the “Clearday”, “Company”, “we”, “us” include Clearday, Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context indicates otherwise. References in this report to “STI” or “Superconductor” are to the Company prior to the September 9, 2021 closing of the merger (the “AIU Merger”) by the Company with Allied Integral United, Inc. (“AIU”) that was described in our registration statement on Form S-4, as amended and supplemented (Registration No. 333-256138), unless otherwise expressly stated or the context indicates otherwise.
The mark “Clearday” is protected under applicable intellectual property laws. Solely for convenience, trademarks of Clearday referred to in this Report may appear without the TM symbol, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and related intellectual property rights.
| II |
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Clearday, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| September 30, 2022 | December 31, 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Other current assets | ||||||||
| - | ||||||||
| Total current assets | ||||||||
| Patents and development | ||||||||
| Operating lease right-of-use assets | ||||||||
| Property and equipment, net | ||||||||
| Other long-term assets | ||||||||
| Non-current assets held for sale | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES, TEMPORARY EQUITY AND DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Due to related parties | ||||||||
| Note payable | ||||||||
| Current portion of long-term debt | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Other current liabilities | ||||||||
| Current liabilities related to assets held for sale | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Long-term debt, less current portion, net | ||||||||
| Non-current liabilities related to assets held for sale | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Temporary equity | ||||||||
| Series
F | ||||||||
| Deficit | ||||||||
| Preferred
stock, $ par value, shares authorized Series A convertible preferred stock, $ par value, shares authorized,
and shares issued and outstanding, as of September 30, 2022 and December 31, 2021, respectively. Liquidation value
of $ | ||||||||
| Common stock, $ par value shares authorized, and shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Clearday, Inc. shareholders’ deficit | ( | ) | ( | ) | ||||
| Non-controlling interest in subsidiaries | ||||||||
| Total deficit | ( | ) | ( | ) | ||||
| TOTAL LIABLITIES, TEMPORARY EQUITY AND DEFICIT | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 1 |
Clearday, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended Sept 30, | Nine Months Ended Sept 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| REVENUES | ||||||||||||||||
| Resident fee revenue, net | $ | $ | $ | $ | ||||||||||||
| Adult day care | ||||||||||||||||
| Commercial property rental revenue | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Wages & operating expenses | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Research and development | ||||||||||||||||
| Loss on impairment | ||||||||||||||||
| Depreciation and amortization expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (income) expenses | ||||||||||||||||
| Interest and other expense | ||||||||||||||||
| Gain on sale of investments | ( | ) | ( | ) | ||||||||||||
| PPP loan forgiveness | ( | ) | ||||||||||||||
| Unrealized gain/(loss) on equity investments | ( | ) | ( | ) | ||||||||||||
| Extinguishment of debt | ( | ) | ( | ) | ||||||||||||
| Other (income)/expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other (income)/expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) from discontinued operations, net of tax | ( | ) | ||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) attributable to non-controlling interest | ( | ) | ( | ) | ||||||||||||
| Preferred stock dividend | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss applicable to Clearday, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted loss per share attributable to Clearday, Inc. | ||||||||||||||||
| Net loss from continued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net (loss)/income from discontinued operations | ( | ) | ||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Weighted average common shares basic and diluted outstanding | ||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 2 |
Clearday, Inc.
Condensed Consolidated Statements of Temporary Equity, Convertible Preferred Stock and Deficit
Nine Months Ended September 30, 2022 and 2021
(Unaudited)
| Temporary Equity Series F Preferred Stock | Preferred Stock Series A | Common Stock | Additional Paid- in | Accumulated | Clearday, Inc. Shareholder | Non-Controlling | Total | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||
| Stock compensation for services | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with reverse merger | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series I convertible preferred stock in subsidiary | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| PIK dividend on convertible preferred stock F | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Issuance of partnership units in subsidiary | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Series I adjustment | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Temporary Equity Series F Preferred Stock | Preferred Stock Series A | Common Stock | Additional Paid- in | Accumulated | Clearday, Inc. Shareholder | Non-Controlling | Total | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||
| PIK dividends accruals on convertible preferred stock F | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Series F incentive common stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Accrued of series I convertible preferred stock in subsidiary | ||||||||||||||||||||||||||||||||||||||||||||
| Series I adjustment | ||||||||||||||||||||||||||||||||||||||||||||
| stock compensation for services | ||||||||||||||||||||||||||||||||||||||||||||
| Shares 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 |
Clearday, Inc.
Condensed Consolidated Statements of Temporary Equity, Convertible Preferred Stock and Deficit
Three Months Ended September 30, 2022 and 2021
| Temporary Equity Series F Preferred Stock | Preferred Stock Series A | Common Stock | Additional Paid- in | Accumulated | Clearday, Inc. Shareholder | Non-Controlling | Total | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Stock compensation for services | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with reverse merger | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of partnership units in subsidiary | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| PIK dividend on convertible preferred stock F | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Series I adjustment | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Temporary Equity Series F Preferred Stock | Preferred Stock Series A | Common Stock | Additional Paid- in | Accumulated | Clearday, Inc. Shareholder | Non-Controlling | Total | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| PIK dividend accrual on convertible preferred stock F | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Series F incentive common stock | - | |||||||||||||||||||||||||||||||||||||||||||
| Accrued of series I convertible preferred stock in subsidiary | ||||||||||||||||||||||||||||||||||||||||||||
| Stock compensation for services | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for loan | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 4 |
Clearday, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the nine months ended | ||||||||
| Sept 30, | Sept 30, | |||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | ( | ) | ( | ) | ||||
| Income from discontinued operations, net of tax | ( | ) | ||||||
| Loss from continuing operations, net of tax | ( | ) | ( | ) | ||||
| Adjustments required to reconcile net loss to cash flows used in operating activities | ||||||||
| Depreciation and amortization expense | ||||||||
| Impairment of assets | ||||||||
| Allowance for doubtful accounts | ||||||||
| Amortization of debt issuance costs | ||||||||
| Gain on PPP loan forgiveness | ( | ) | ||||||
| Extinguishment of debt | ( | ) | ||||||
| Stock based Compensation | ||||||||
| Non-cash lease expenses | ||||||||
| Gain on sale of investment | ( | ) | ||||||
| Unrealized gain/loss on Securities | ( | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses | ( | ) | ||||||
| Other current assets | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Accrued interest | ||||||||
| Deferred revenue | ( | ) | ||||||
| Other non-current asset | ( | ) | ||||||
| Other non-current liabilities | ||||||||
| Other current liabilities | ( | ) | ||||||
| Change in operating lease liability | ( | ) | ( | ) | ||||
| Net cash used in activities of continuing operations | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities of discontinued operations | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Payments for property and equipment | ( | ) | ||||||
| Cash acquired from merger transaction | ||||||||
| Payment for capitalized software costs and patent | ( | ) | ||||||
| Proceeds from sale of an investment | ||||||||
| Payment for acquisitions | ( | ) | ||||||
| Acquisitions | ||||||||
| Debt to Equity Conversion of Series A Preferred Stock | ||||||||
| Net cash used in investing activities of continuing operations | ( | ) | ||||||
| Net
cash provided by investing activities of discontinued operations | ||||||||
| Net cash provided by investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayment of long-term & short-term debt | ( | ) | ( | ) | ||||
| Extinguish of debt | ||||||||
| Borrowings on long-term & short-term debt | ||||||||
| Proceeds of sale of preferred stock | ||||||||
| Net cash provided by continuing operations | ||||||||
| Net cash used in financing activities of discontinued operations | ( | ) | ||||||
| Net cash used in financing activities | ||||||||
| Change in cash and restricted cash from continuing operations | ( | ) | ( | ) | ||||
| Change in cash and restricted cash from discontinued operations | ||||||||
| Cash and restricted cash at beginning of the year | ||||||||
| Cash and restricted cash at end of year | ||||||||
| Reconciliation of cash and restricted cash consist of the following: | ||||||||
| End of period | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| Beginning of period | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| Supplemental cash flow information: | ||||||||
| Non-cash financing activities | ||||||||
| Net assets acquired in Merger | ||||||||
| Primrose acquisitions deferred payment | ||||||||
| Merger consideration | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
| 1. | Organization, Description of Organization, Basis of Presentation, Summary of Significant Accounting Policies, Liquidity and Going Concern |
Description of Business
Clearday, Inc., a Delaware corporation (the “Company”), formerly known as Superconductor Technologies Inc., was established in 1987 and closed a merger (the “AIU Merger”) with Allied Integral United, Inc., a Delaware corporation (“AIU”), on September 9, 2021. This merger was described in our registration statement (“Merger Registration Statement”) on Form S-4, as amended and supplemented (Registration No. 333-256138). Prior to the closing of the AIU Merger, the Company was a leading company in developing and commercializing high temperature superconductor (“HTS”) materials and related technologies. As described in the Merger Registration Statement, after the AIU Merger, the Company continued the businesses of AIU and continued the businesses of the Company related to its Sapphire Cryocooler and its related patents and intellectual property. AIU was incorporated on December 20, 2017 and began its business on December 31, 2018 when it acquired the businesses of five (5) memory care residential facilities and other businesses (the “2018 Acquisition”). The memory care business is conducted through the Company’s Memory Care America LLC subsidiary (“MCA”), which has been in the residential care business since November 2010 and has been managed by the Company’s executives for approximately 6 years. Since the 2018 Acquisition, the Company has been developing innovative care and wellness products and services focusing on the older American market.
All of the Company’s assets that were acquired in the 2018 Acquisition and are not related to the memory care facilities or the non-acute care and wellness industry were designated as non-core businesses and held for disposition. Accordingly, such assets and liabilities are classified as held for sale in the unaudited condensed consolidated balances sheets as of September 30, 2022, and December 31, 2021. Additionally, the results of operations for these non-core businesses are classified as income from discontinued operations within the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and used in 2021.
Liquidity and Going Concern
The
Company has incurred significant cumulative consolidated operating losses and negative cash flows. As of September 30, 2022, the
Company has an accumulated deficit of a net loss from continuing operations of $
| 2. | Summary of Significant Accounting Policies |
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, including its wholly owned subsidiaries. In 2019, AIU Alternative Care, Inc., a Delaware corporation (“AIU Alt Care”), and Clearday Alternative Care Oz Fund, L.P, a Delaware limited partnership (“Clearday OZ Fund”), were formed by AIU. The Company owns all of the voting interests of AIU Alt Care and AIU Alt Care is the sole general partner of Clearday OZ Fund, and less than 1% of the preferred economic interests in such companies.
In
November, 2019, AIU Alt Care filed a certificate of designation that authorized preferred stock designated as the Series I,
In
October, 2019, AIU Alt Care formed AIU Impact Management, LLC and Clearday OZ Fund was formed. AIU Impact Management, LLC manages Clearday
OZ Fund as its general partner, owns
The
exchange rate for each of the AIU Alt Care Preferred Stock and the limited partnership units in Clearday OZ Fund are equal to (i)
The Company reports its non-controlling interest in subsidiaries as a separate component of equity in the unaudited condensed consolidated balance sheets and reports both net loss attributable to the non-controlling interest and net loss attributable to the Company’s common shareholders on the face of the unaudited condensed consolidated statements of operations.
| 6 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the annual financial statements of the Company and of AIU that are contained in the Company’s Form 10-K, as amended and supplemented. In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated upon consolidation. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required GAAP in the United States of America for complete financial statements. In the opinion of the Company’s management, any adjustments contained in the accompanying unaudited consolidated financial statements are of a normal recurring nature, and are necessary to fairly present the financial position of the Company as of September 30, 2022, along with its results of operations for the three and nine months period ended September 30, 2022 and 2021 and cash flows for the three and nine month periods ended September 30, 2022 and 2021. Interim financial statements are prepared on a basis consistent with the Company’s annual financial statements and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021. Results of operations for the three and nine month periods ended September 30, 2022 and 2021, are not necessarily indicative of the operating results that may be expected for the full year ending December 31, 2022.
Unaudited Interim Financial Information
The unaudited condensed consolidated financial statements as of September 30, 2022 have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and GAAP. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of the Company, these unaudited interim condensed consolidated financial statements contain all adjustments necessary, all of which are of a normal and recurring nature, to present fairly the Company’s financial position, results of operations and cash flows. Interim results are not necessarily indicative of results for a full year or future periods. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2021, as well as the audited consolidated financial statements of Clearday that are included in our Annual Report on Form 10-K, as amended and supplemented.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities and contingencies at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Management believes that these estimates and assumptions are reasonable, however, actual results may differ and could have a material effect on future results of operations and financial position.
Significant estimates in our condensed consolidated financial statements relate to revenue recognition, including contractual allowances, the allowance of doubtful accounts, self-insurance reserves, long-lived assets, impairment of long-lived assets and estimates concerning our provisions for income taxes.
| 7 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Fair Value of Financial Instruments
The Company’s financial instruments are limited to cash, accounts receivable, accounts payable, operating leases and mortgage notes payable. The fair value of these financial instruments was not materially different from their carrying values on September 30, 2022.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, the Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business as one operating segment.
Cash and Restricted Cash
Cash, consisting of short-term, highly liquid investments and money market funds with original maturities of nine months or less at the date of purchase, are carried at cost plus accrued interest, which approximates market.
Restricted cash as of September 30, 2022 and December 31, 2021 includes cash that the Company deposited as security for obligations arising from property taxes, property insurance and replacement reserve the Company is required to establish escrows as required by its mortgages and certain resident security deposits.
Investments
The Company follows Accounting Standard Update 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The Company has no investment in securities as of September 30, 2022 and December 31, 2021.
Goodwill
Goodwill, which has an indefinite useful life, represents the excess of purchase consideration over fair value of net assets acquired. The Company determines whether goodwill may be impaired by comparing the carrying value of the single reporting unit, including goodwill, to the fair value of the reporting unit. If the fair value is less than the carrying amount, a more detailed analysis is performed to determine whether goodwill is impaired. The impairment loss, if any, is measured as the excess of the carrying value of the goodwill over the implied fair value of the goodwill and is recorded in the Company’s consolidated statements of operations.
Software Capitalization
With
regards to developing software, any application costs incurred during the development state, both internal expenses and those paid to
third parties are capitalized. At September 30. 2022 and December 31, 2021, $
Risks and Uncertainties
The Company’s financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, and trade receivables. At certain times throughout the year, the Company may maintain deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash balances due to the financial position of the depository institutions in which those deposits are held. The Company performs ongoing credit evaluations of its customers, and the risk with respect to trade receivables is further mitigated by the diversity, both by geography, of the customer base.
| 8 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was adopted.
The CARES Act appropriated funds for the U.S. Small Business Administration Paycheck Protection Program (“PPP”) loans that are forgivable in certain situations and employment related tax credits to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19. The Company continues to examine the impact that the CARES Act may have on its business and is currently, unable to determine the impact that the CARES Act will have on its financial condition, results of operations, or liquidity.
The Company is also considering other applicable federal and state programs, including the Families First Coronavirus Response Act, which is a federal law meant to respond to the economic impacts of the ongoing COVID-19 pandemic that provides certain credits to employers, and the Work Opportunity Tax Credit “WOTC”, which is a federal tax credit available to employers who invest in American job seekers who have consistently faced barriers to employment. Employers may meet their business needs and claim a tax credit if they hire an individual who is in a WOTC targeted group.
Basic and diluted earnings per share are computed and disclosed in accordance with FASB ASC Topic 260, “Earnings Per Share”. The Company utilizes the two-class method to compute earnings available to common shareholders. Under the two-class method, earnings are adjusted by accretion amounts to redeemable noncontrolling interests recorded at redemption value. The adjustments represent dividend distributions, in substance, to the noncontrolling interest holder as the holders have contractual rights to receive an amount upon redemption other than the fair value of the applicable shares. As a result, earnings are adjusted to reflect this in substance distribution that is different from other common shareholders. In addition, the Company allocates net earnings to each class of common stock and participating security as if all of the net earnings for the period had been distributed. The Company’s participating securities consist of share-based payment awards that contain a non-forfeitable right to receive dividends and therefore are considered to participate in undistributed earnings with common shareholders. Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.
Accounts Receivable and Allowance for Doubtful Accounts
The Company records accounts receivable at their estimated net realizable value. Additionally, the Company estimates allowances for uncollectible amounts based upon factors which include, but are not limited to, historical payment trends, write-off experience, and the age of the receivable as well as a review of specific accounts, the terms of the agreements, the residents, the payers’ financial capacity to pay and other factors which may include likelihood and cost of litigation.
The allowance for doubtful accounts reflects estimates that the Company periodically reviews and revises based on new information, to which revisions may be material. The Company’s allowance for doubtful accounts consists of the following:
| Allowance for Doubtful Accounts | Balance at Beginning of Period | Provision for Doubtful Accounts | Write-Offs | Balance
at End of Period | ||||||||||||
| December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||
| September 30, 2022 | $ | $ | $ | |||||||||||||
Assets and Liabilities Held for Sale
The Company has classified its real estate as held for sale as these are non-core assets no longer used in operations. The Company recorded these assets as the less of cost or carrying value.
| 9 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line basis over their estimated useful lives, which are typically as follows:
| Asset Class | Estimated Useful Life (In Years) | |||
| Buildings | ||||
| Building improvements | ||||
| Equipment | ||||
| Computer equipment and software | ||||
| Furniture and fixtures | ||||
The Company regularly evaluates whether events or changes in circumstances have occurred that could indicate impairment in the value of the Company’s long-lived assets. If there is an indication that the carrying value of an asset is not recoverable, the Company determines the amount of impairment loss, if any, by comparing the historical carrying value of the asset to its estimated fair value, with any amount in excess of fair value recognized as an expense in the current period. The Company determines estimated fair value through an evaluation of recent financial performance, recent transactions for similar assets, market conditions and projected cash flows using standard industry valuation techniques. Undiscounted cash flow projections and estimates of fair value amounts are based on a number of assumptions such as revenue and expense growth rates, estimated holding periods and estimated capitalization rates (Level 3).
Valuation of Long-Lived Assets
Long-lived assets to be held and used, including property and equipment, right to use assets and definite life intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Note 3 - Real Estate, Property and Equipment, Net.
Gain (Loss) on Sale of Assets
The Company enters into real estate transactions which may include the disposal of certain commercial shopping centers and hotels, including the associated real estate; such transactions are recorded in Note 5 – Discontinued Operations. The Company recognizes gain or loss from the sale of equity method investments when the transfer of control is complete, and the Company has no continuing involvement with the transferred financial assets.
Legal Proceedings and Claims
The Company has been, is currently, and expects in the future to be involved in claims, lawsuits, and regulatory and other government audits, investigations and proceedings arising in the ordinary course of the Company’s business, some of which may involve material amounts. The Company 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 FASB, Accounting Standards Codification™, or ASC, Topic 450, “Contingencies.” Under FASB ASC Topic 450, loss contingency provisions are recorded for probable and estimable losses at the Company’s best estimate of a loss or, when a best estimate cannot be made, at the Company’s estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment, and are refined as additional information becomes known. Accordingly, the Company is often initially unable to develop a best estimate of loss and therefore the estimated minimum loss amount, which could be zero, is recorded; then, as information becomes known, the minimum loss amount is updated, as appropriate. Occasionally, a minimum or best estimate amount may be increased or decreased when events result in a changed expectation.
| 10 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Lease Accounting
The Company follows FASB ASC Topic 842, “Leases”, or ASC Topic 842, utilizing the modified retrospective transition method with no adjustments to comparative periods presented. The Company has elected the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized.
Lessee
The Company regularly evaluates whether a contract meets the definition of a lease whenever a contract grants a party the right to control the use of an identified asset for a period of time in exchange for consideration. To the extent the identified asset is able to be shared among multiple parties, the Company has determined that one party does not have control of the identified asset and the contract is not considered a lease. The Company accounts for contracts that do not meet the definition of a lease under other relevant accounting guidance (such as ASC 606 for revenue from contacts with customers).
The Company’s lease agreements primarily consist of building leases. These leases generally contain an initial term of 15 to 17 years and may contain renewal options. If the Company’s lease agreements include renewal option periods, the Company includes such renewal options in its calculation of the estimated lease term when it determines the options are reasonably certain to be exercised. When such renewal options are deemed to be reasonably certain, the estimated lease term determined under ASC Topic 842 will be greater than the non-cancelable term of the contractual arrangement.
The Company classifies its lessee arrangements at inception as either operating leases or financing leases. A lease is classified as a financing lease if at least one of the following criteria is met: (1) the lease transfers ownership of the underlying asset to the lessee, (2) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (3) the lease term is for a major part of the remaining economic life of the underlying asset, (4) the present value of the sum of the lease payments equals or exceeds substantially all of the fair value of the underlying asset, or (5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease if none of the five criteria described above for financing lease classification is met. The Company has no financing leases as of September 30, 2022.
Right of use assets “ROU” assets associated with operating leases are included in “Operating Lease Right of Use Asset” on the Company’s unaudited condensed balance sheet. Current and long-term portions of lease liabilities related to operating leases are included in “Current Portion of Operating Lease Liabilities” and “Operating Lease Liabilities, net of Current Portion” on the Company’s balance sheets as of September 30, 2022. ROU assets represent the Company’s right to use an underlying asset for the estimated lease term and lease liabilities represent the Company’s present value of its future lease payments. In assessing its leases and determining its lease liability at lease commencement or upon modification, the Company was not able to readily determine the rate implicit for its lessee arrangements, and thus has used its incremental borrowing rate on a collateralized basis to determine the present value of the lease payments. The Company’s ROU assets are measured as the balance of the lease liability plus or minus any prepaid or accrued lease payments and any unamortized initial direct costs. Operating lease expenses are recognized on a ratable basis, regardless of whether the payment terms require the Company to make payments annually, quarterly, monthly, or for the entire term in advance. If the payment terms include fixed escalator provisions, the effect of such increases is recognized on a straight-line basis. The Company calculates the straight-line expense over the contract’s estimated lease term, including any renewal option periods that the Company deems reasonably certain to be exercised.
The Company reviews the carrying value of its ROU assets for impairment, similar to its other long-lived assets, whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company could record impairments in the future if there are changes in (1) long-term market conditions, (2) expected future operating results or (3) the utility of the assets that negatively impact the fair value of its ROU assets.
Lessor
The Company’s lessor arrangements primarily included tenant contracts within shopping centers, which is included in discontinued operations. The Company classifies its leases at inception as operating, direct financing, or sales-type leases. A lease is classified as a sales-type lease if at least one of the following criteria is met: (1) the lease transfers ownership of the underlying asset to the lessee, (2) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (3) the lease term is for a major part of the remaining economic life of the underlying asset, (4) the present value of the sum of the lease payments equals or exceeds substantially all of the fair value of the underlying assets or (5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. Furthermore, when none of the above criteria is met, a lease is classified as a direct financing lease if both of the following criteria are met: (1) the present value of the of the sum of the lease payments and any residual value guaranteed by the lessee, that is not already reflected in the lease payments, equals or exceeds the fair value of the underlying asset and (2) it is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. A lease is classified as an operating lease if it does not qualify as a sales-type or direct financing lease. Currently, the Company classifies all of its lessor arrangements as operating leases.
| 11 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Revenues from the Company’s lessor arrangements are recognized on a straight-line, ratable basis over the fixed, non-cancelable term of the relevant tenant contract, regardless of whether the payments from the tenant are received in equal monthly amounts during the life of a tenant contract. Certain of the Company’s tenant contracts contain fixed escalation clauses (such as fixed-dollar or fixed-percentage increases) or inflation-based escalation clauses (such as those tied to the change in CPI) and is included in discontinued operations. If the payment terms call for fixed escalations, upfront payments, or rent-free periods, the rental revenue is recognized on a straight-line basis over the fixed, non-cancelable term of the agreement. When calculating straight-line site rental revenues, the Company considers all fixed elements of tenant contractual escalation provisions.
Certain of the Company’s arrangements with tenants contain both lease and non-lease components. In such circumstances, the Company has determined (1) the timing and pattern of transfer for the lease and non-lease component are the same and (2) the stand-alone lease component would be classified as an operating lease. As such, the Company has aggregated certain non-lease components with lease components and has determined that the lease components represent the predominant component of the arrangement.
Income Taxes
The Company’s income tax expense includes U.S. income taxes. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences to be included in the Company’s unaudited condensed consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse, while the effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The
Company can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained
upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with
a tax position is measured as the largest amount that has a
Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent, the Company believes that the Company is more likely than not that all or a portion of deferred tax assets will not be realized, the Company establishes a valuation allowance to reduce the deferred tax assets to the appropriate valuation. To the extent the Company establishes a valuation allowance or increase or decrease this allowance in a given period, the Company includes the related tax expense or tax benefit within the tax provision in the unaudited condensed consolidated statement of operations in that period. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In the future, if the Company determines that it would be able to realize its deferred tax assets in excess of their net recorded amount, the Company will make an adjustment to the deferred tax asset valuation allowance and record an income tax benefit within the tax provision in the unaudited condensed consolidated statement of operations in that period.
The Company pays franchise taxes in certain states in which it has operations. The Company has included franchise taxes in general and administrative and operating expenses in its unaudited condensed consolidated statements of operations.
Revenue Recognition
The Company recognizes revenue from contracts with customers in accordance with ASC Topic 606, “Revenue from Contracts with Customers”, or ASC Topic 606, using the practical expedient in paragraph 606-10-10-4 that allows for the use of a portfolio approach, because we have determined that the effect of applying the guidance to our portfolios of contracts within the scope of ASC Topic 606 on our unaudited condensed consolidated financial statements would not differ materially from applying the guidance to each individual contract within the respective portfolio or our performance obligations within such portfolio. The five-step model defined by ASC Topic 606 requires the Company to: (i) identify its contracts with customers, (ii) identify its performance obligations under those contracts, (iii) determine the transaction prices of those contracts, (iv) allocate the transaction prices to its performance obligations in those contracts and (v) recognize revenue when each performance obligation under those contracts is satisfied. Revenue is recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services.
A substantial portion of the Company’s revenue at its independent living and assisted living communities relates to contracts with residents for services that are generally under ASC Topic 606. The Company’s contracts with residents and other customers that are within the scope of ASC Topic 606 are generally short-term in nature. The Company has determined that services performed under those contracts are considered one performance obligation in accordance with ASC Topic 606 as such services are regarded as a series of distinct events with the same timing and pattern of transfer to the resident or customer. Revenue is recognized for those contracts when the Company’s performance obligation is satisfied by transferring control of the service provided to the resident or customer, which is generally when the services are provided over time.
| 12 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Resident fees at our independent living and assisted living communities consist of regular monthly charges for basic housing and support services and fees for additional requested services, such as assisted living services, personalized health services and ancillary services. Fees are specified in our agreements with residents, which are generally short term (30 days to one year), with regular monthly charges billed in advance. Funds received from residents in advance of services provided are not material to our unaudited consolidated financial statements. Some of our senior living communities require payment of an upfront entrance fee in advance of a resident moving into the community; substantially all of these community fees are non-refundable and are initially recorded as deferred revenue and included in accrued expenses and other current liabilities in our unaudited condensed consolidated balance sheets. These deferred amounts are then amortized on a straight-line basis into revenue over the term of the resident’s agreement. When the resident no longer resides within our community, the remaining deferred non-refundable fees are recognized in revenue. Revenue recorded and deferred in connection with community fees is not material to our unaudited condensed consolidated financial statements. Revenue for basic housing and support services and additional requested services is recognized in accordance with ASC Topic 606 and measured based on the consideration specified in the resident agreement and is recorded when the services are provided.
Core Business – Continuing Operations
Resident Care Contracts. Resident fees at the Company’s senior living communities and adult daycare may consist of regular monthly charges for basic housing and support services and fees for additional requested services and ancillary services. Fees are specified in the Company’s agreements with residents, which are generally short term (30 days to one year), with regular monthly charges billed the first of the month. Funds received from resident in advance of services are not material to the Company’s unaudited condensed consolidated financial statements.
| 13 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Cost of Product Revenue
Cost of product revenue represents direct and indirect costs incurred to bring the product to saleable condition.
Research and Development Expenses
All research and development costs are charged to expense as incurred. Research and development expenses primarily include (i) payroll and related costs associated with research and development performed, (ii) costs related to clinical and preclinical testing of the Company’s technologies under development, and (iii) other research and development costs including allocations of facility costs.
PPP Loans
The Company recognizes PPP loans under the Small Business Administration as debt instruments in accordance with ASC 470, “Debt.” When the loan proceeds are received, a long-term liability account (i.e., “PPP Loan Liability”) is set up. The presentation of the loan in the balance sheet is accounted for in accordance with GAAP regarding the presentation of assets and liabilities, whereas the portion of the loan due within 12 months from year end will be considered a current liability and the remaining portion will be considered a long-term liability. Also, under this guidance, a borrower should not recognize any income from the extinguishment of its debt until the borrower has been legally released as the primary obligor under the loan. In addition, the forgiveness of PPP loans as income will be recorded as other income and not included in income from operations based on the unprecedented nature of COVID-19.
ERTC Funds
The
Company was eligible to claim the employee retention tax credit (“ERTC”) for certain employees under the CARES Act. The
2021 refundable tax credit is available to employers that fully (or partially) suspend operations during any calendar quarter in
2021 due to orders from an appropriate governmental authority, which limits commerce, travel, or group meetings due to COVID-19. The
credit is equal to 70% of qualified wages paid after March 12, 2020 through December 31, 2020 to qualified employees, with a maximum
credit of $
General and Administrative Expenses
General and administrative expenses represent personnel costs for employees involved in general corporate functions, including finance, accounting, legal and human resources, among others. Additional costs included in general and administrative expenses consist of professional fees for legal (including patent costs), audit and other consulting services, travel and entertainment, charitable contributions, recruiting, allocated facility and general information technology costs, depreciation and amortization, and other general corporate overhead expenses.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses” (Topic 326), which requires a financial asset, or a group of financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This ASU eliminates the probable initial recognition threshold and instead requires reflection of an entity’s current estimate of all expected credit losses. In addition, this ASU amends the current available for sale security other-than-temporary impairment model for debt securities. The length of time that the fair value of an available for sale debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists and credit losses will now be limited to the difference between a security’s amortized cost basis and its fair value. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”, which amends the transition and effective date for nonpublic entities and clarifies that receivables arising from operating leases are not in the scope of this ASU. These ASUs are effective for reporting periods beginning after December 15, 2022. The Company is assessing the potential impact that the adoption of these ASUs will have on its unaudited condensed consolidated financial statements.
In December 2019, the FASB also issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which simplifies certain requirements under Topic 740, including eliminating the exception to intra-period tax allocation when there is a loss from continuing operations and income from other sources, such as other comprehensive income or discontinued operations. The amendments in this ASU are effective for the fiscal year beginning after December 15, 2020. The Company adopted the ASU effective January 1, 2021 and has determined that this ASU does not have a material impact on its unaudited condensed consolidated financial statements.
| 14 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
| 3. | Real Estate, Property and Equipment, Net |
Property and equipment, net, consists of the following:
Memory Care Facilities and Corporate
Estimated Useful Lives | September 30, 2022 | December 31, 2021 | ||||||||||
| Land | $ | $ | ||||||||||
| Building and building improvements | ||||||||||||
| Furniture, fixtures, and equipment | ||||||||||||
| Total | ||||||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||||||
| Real estate, property and equipment, net | $ | $ | ||||||||||
Non-core businesses classified as assets held for sale:
Estimated Useful Lives | September 30, 2022 | December 31, 2021 | ||||||||||
| Land | $ | $ | ||||||||||
| Building and building improvements | ||||||||||||
| Total | ||||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||||
| Real estate, property and equipment, net | $ | $ | ||||||||||
The
Company recorded depreciation expense relating to real estate, property, and equipment for the Company’s memory care facilities
and corporate assets in the amount of $
The Company has reviewed the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If there is an indication that the value of an asset is not recoverable, the Company determines the amount of impairment loss, if any, by comparing the historical carrying value of the asset to its estimated fair value. The Company determined estimated fair value based on input from market participants, the Company’s experience selling similar assets, market conditions and internally developed cash flow models that the Company’s assets or asset groups are expected to generate, and the Company considers these estimates to be a Level 3 fair value measurement.
Based on the Company’s review of carrying value of long-lived assets included in discontinued operations, the Company concluded that a)several of its properties were sold and did not warrant consideration; b) certain properties belonging to their continuing operations segment generate revenue, are cash flow positive and have assets with low carrying values as compared to the recoverable amounts and therefore do not meet impairment requirements; and that c) several properties might be impaired due to extended closures. Both the SeaWorld and Buda hotels have experienced extended closures since March, 2020 due to the COVID-19 pandemic and this has meant significant reductions in cash flows and on the ability to repay the mortgage loans on the properties.
| 15 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
| 4. | Leases |
The Company follows ASC 842, as discussed in Note 1 – Summary of Significant Accounting Policies, the Company has elected the package of practical expedients offered in the transition guidance which allows management not to reassess the lease identification, lease classification, and initial direct costs. The Company has elected the accounting policy practical expedient to exclude recording short term leases for all asset classes, as right-of-use assets, and lease liabilities on the unaudited condensed consolidated balance sheet. Finally, the Company has elected to recognize lease components and non-lease components separately for real estate leases.
Leases for Memory Care Facilities
The
Company leases three memory care facilities from MHI-MC San Antonio, LP, MHI-MC Little Rock, LP, and MHI-MC New Braunfels, LP (collectively
“MHI entities”) under three separate lease agreements and originally recorded a right of use asset and a lease liability
of $
The Company leased the memory care Simpsonville Facility from MC-Simpsonville, SC-1-UT, LLC (the “Simpsonville Landlord”) under a 15-year non-cancelable lease agreement. Beginning January 2019, the Company ceased paying the Simpsonville Landlord rent. The Landlord had filed two lawsuits against the guarantors of the lease including a subsidiary of Clearday. During the third quarter of 2022, the Company and the Simpsonville Landlord terminated this lease and agreed to settle one of two actions for these litigations. See Note 7 – Commitments and Contingencies for additional information. The ROU liability was removed from the balance sheet since the lease was terminated on August 5, 2022.
All
leases are classified as operating leases. The Company does not have any leases within its non-core business. Therefore, no right-of-use
assets or lease liabilities were recorded within non-current assets held for sale or lease liability on the unaudited condensed consolidated
balance sheet following the adoption of ASC 842. Weighted-average remaining lease terms and discount rate as of September 30, 2022, are
| 16 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Lease Costs
For the three and nine months ended September 30, 2022 and 2021, the lease costs recorded in the wages and operating expenses of the unaudited condensed consolidated statement of operations are as follows:
For the Three Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Lease costs: | ||||||||
| Operating lease costs | $ | $ | ||||||
| Short-term lease costs | ||||||||
| Total lease costs | $ | $ | ||||||
For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Lease costs: | ||||||||
| Operating lease costs | $ | $ | ||||||
| Short-term lease costs | $ | |||||||
| Total lease costs | $ | $ | ||||||
Operating Lease Payments
The following table summarizes the maturity of the Company’s operating lease liabilities as of September 30, 2022:
| Year Ending | Operating Leases | |||
| 2022 (Remaining of 2022) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total minimum lease payments | $ | |||
| Less: amounts representing interest | ||||
| Present value of future minimum lease payments | ||||
| Less: current portion | ||||
| Non-current lease liabilities | $ | |||
| 5. | Discontinued Operations |
The Company held two hotel properties during 2021, each of which were classified as non-core assets and were sold or disposed of during 2021.
| 17 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
During the quarter ended September 30, 2022, the Company sold one non-core asset
On
April 5, 2022, Leander Associates, Ltd., a Texas limited partnership (“Leander Seller”) also executed a Purchase and Sale
Agreement with Leander Ridge, LLC, a Texas limited liability company (“Buyer”) to sell one of Clearday’s non-core assets:
a land parcel located in Leander, Texas (the “Leander Property”) for a consideration of $
The following statements are the unaudited condensed consolidated balance sheets and income statements for the Company’s discontinued operations:
| September 30, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Investments in non-consolidated entities | ||||||||
| Note receivables | ||||||||
| Real estate, property and equipment, net | ||||||||
| Total long-term assets held for sale | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Accrued interest | ||||||||
| Current portion of long-term debt | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Note payable | ||||||||
| Long-term debt, less current portion | ||||||||
| Total long-term liabilities held for sale | ||||||||
| TOTAL LIABILITIES | $ | $ | ||||||
| 18 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| REVENUES | ||||||||
| Commercial property rental revenue | $ | $ | ||||||
| Total revenues, net | ||||||||
| Costs and expenses | ||||||||
| Operating expenses | ||||||||
| General and administrative expenses | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other/(income) expenses | ||||||||
| Interest expense | ||||||||
| Gain on disposal of assets | ||||||||
| Equity income from investees, net of applicable taxes | ||||||||
| Impairment expense (recovery) | ( | ) | ||||||
| Other (income) expenses | ( | ) | ( | ) | ||||
| Total (income)/expense | ( | ) | ( | ) | ||||
| Net loss (income) | $ | ( | ) | $ | ||||
| 6. | Indebtedness |
As
of September 30, 2022 and December 31, 2021, the current portion of long-term debt within the Company’s unaudited condensed financial
statements for our core MCA and Corporate facilities is $
As
of September 30, 2022 and December 31, 2021 the long term debt less the current portion of the company debt is $
Interest and Future Maturities
The
Company has recorded interest expense in the accompanying unaudited condensed consolidated financial statements of $
The change in the interest expense reflects primarily the impact of the merchant cash loans we have taken out which carry a higher interest rate.
| As of September 30, | Continuing Core | Discontinued Non-Core | Total | |||||||||
| 2022 | $ | $ | $ | |||||||||
| 2023 | ||||||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| Thereafter | ||||||||||||
| Total obligations | $ |
| $ | $ | |
| 19 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes the maturity of the Company’s long-term debt and notes payable as of September 30, 2021:
| Maturity Date | Interest Rate | September 30, 2022 | December 31, 2021 | |||||||||||||
| Memory Care (Core) Facilities: | ||||||||||||||||
| Naples Equity Loan | % | $ | $ | |||||||||||||
| Libertas Financing Agreement | % | |||||||||||||||
| New Braunfels Samson Funding 1 | % | |||||||||||||||
| New Braunfels Samson Group 2 | % | |||||||||||||||
| Naples Operating LG Funding | % | |||||||||||||||
| Naples LLC CFG Merchant Solutions | % | |||||||||||||||
| MCA Invesque Loan | % | |||||||||||||||
| New Braunfels Business Loan | % | |||||||||||||||
| Gearhart Loan | % | |||||||||||||||
| SBA PPP Loans | % | |||||||||||||||
| Buda 2K Hospitality LLC | % | |||||||||||||||
| Equity Secure Fund I, LLC | % | |||||||||||||||
| Bank Direct Payable | % | |||||||||||||||
| Naples Operating PIRS Capital | % | |||||||||||||||
| Little Rock Libertas | % | |||||||||||||||
| PIRS Capital Financing Agreement | % | |||||||||||||||
| Little Rock Samson Funding #3 | % | |||||||||||||||
| Naples Samson #1 | % | |||||||||||||||
| Westover Samson #1 | % | |||||||||||||||
| Naples LG Funding #2 | % | |||||||||||||||
| New Braunfels Samson #1 | % | |||||||||||||||
| 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 | % | |||||||||||||||
| AIU Sixth Street | 12. | % | ||||||||||||||
| Westover Hills FOX Capitol | % | |||||||||||||||
| Westover Hills Arsenal | % | |||||||||||||||
| Westover Samson Funding | % | |||||||||||||||
| Notional amount of debt | ||||||||||||||||
| Less: current maturities | ||||||||||||||||
| $ | $
| |||||||||||||||
The indebtedness set forth above with a zero percent interest were provided by creditors under agreements (“MCA Agreements”). During the fourth quarter of 2022, 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 accounts are considered in default. See Note 7 – Commitments and Contingencies for additional information.
| 20 |
| Non-core businesses classified as liabilities held for sale: | ||||||||||||||
| Real Estate: | ||||||||||||||
| Artesia Note (6) | Variable | $ | | $ | ||||||||||
| Tamir Note | % | |||||||||||||
| Leander Note | % | |||||||||||||
| Carpenter Enterprises | ||||||||||||||
| Leander Stearns National Association | % | |||||||||||||
| Notional amount of debt | | |||||||||||||
| Less: current maturities | ||||||||||||||
| $ | | $ | ||||||||||||
| Core Businesses (Continuing Operations) Notes Payable | ||||||||||||||||
| Cibolo Creek Partners promissory note | % | $ | $ | |||||||||||||
| EIDL SBA Treas 310 | % | | | |||||||||||||
| AGP | % | | | |||||||||||||
| Mast Hill #1 | % | |||||||||||||||
| Mast Hill #2 | % | |||||||||||||||
| Five C’s Loan | % | | | |||||||||||||
| Jefferson | % | |||||||||||||||
| GS Capital | % | |||||||||||||||
| Firstfire | % | |||||||||||||||
| Round Rock Development Partners Note | % | | | |||||||||||||
| Notional amount of debt | | | ||||||||||||||
| Less: current maturities | ||||||||||||||||
| $ | $ | |||||||||||||||
| Other Current Liabilities | ||||||||||||||||
| Due to Related Parties (including accrued guarantee fees) | | | ||||||||||||||
| $ | $ | |||||||||||||||
| Non-Core Businesses (Discontinued Continuing Operations) Notes Payable | ||||||||||||||||
| Cibolo Creek Partners promissory note | % | $ | $ | |||||||||||||
| Notional amount of debt | | | ||||||||||||||
| Other Current Liabilities | ||||||||||||||||
| Guarantee Fees | ||||||||||||||||
| * | On
July 7, 2022, this note was modified to reduce the principal to $ |
On
the accompanying unaudited condensed consolidated balance sheet for core business operations includes $
| 21 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Memory Care (Core) Facilities:
Naples Equity Loan
On
April 29, 2021, the Company executed a secured promissory note with Benworth Capital Partners, LLC in the amount of $
PPP Loans
In May 2020, the Company was granted four separate loans, which has enabled the Company to retain the Company’s employees during the period of disruption created by the Coronavirus pandemic. STI was granted one loan in March 2021. The PPP Loans, which are evidenced by Notes issued by the Company (the “Note”), mature in May 2022 and bear interest at a fixed rate of 1.0% per annum, accruing from May 2020 (“Loan Date”) and payable monthly. The Note is unsecured and guaranteed by the SBA. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The Note provides for customary defaults, including failure to make payment when due or to fulfill the Company’s obligations under the notes or related documents, reorganizations, mergers, Consolidations or other changes to the Company’s business structure, and certain defaults on other indebtedness, bankruptcy events, adverse changes in financial condition or civil or criminal actions. The PPP loans may be accelerated upon the occurrence of a default. We expect that our remaining PPP loans (including STI) will be forgiven in the upcoming months.
| 22 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
AGP Promissory Note
The
Company entered into an unsecured promissory note with A.G.P./Alliance Global Partners (“AGP”) which was the financial adviser
to AIU in connection with the merger. The $
Gearhart Loan
On
April 1, 2012, the Company executed a promissory note with Betty Gearhart for $
Equity Secured Fund I, LLC
On
March 26, 2021, the Company executed a promissory note for $
| 23 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Firstfire
On
April 5, 2022, entered into a Securities Purchase Agreement (the “Note Purchase Agreement”) to issue an unsecured
promissory note to an institutional lender. We used the proceeds of this financing to fund our operations. The Note provides for the
net funding to Clearday of $
The
Note provides for a one-year maturity. Monthly payments on the Note of $
Jefferson Street
On
May 16, 2022, we entered into a Securities Purchase Agreement (the “Jefferson Purchase Agreement”) to issue an unsecured
promissory note (the “Jefferson Note”) to an institutional lender. This Jefferson Note provides for the proceeds to us of
$
| 24 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
GS Capital
On
May 20, 2022, we entered into a Securities Purchase Agreement (the “GS Purchase Agreement”) to issue an unsecured promissory
note (the “GS Note”) to an institutional lender. This GS Note provides for the proceeds to us of $
Sixth Street
The
Note provides for the net funding to Clearday of $
The
Note provides for a
| 25 |
Upon
any Event of Default,
Mast Hill Loans
On
July 5, 2022, the Company closed a loan with an institutional lender, Mast Hill Fund, L.P. (“Mast Hill”), under the terms
of a Securities Purchase Agreement dated as of July 1, 2022 and issued an unsecured promissory note in the principal amount of $
The
obligations under the MH Note 1 incur interest equal to
We paid Mast Hill a commitment fee (“Commitment Fee”) of our common stock (“Commitment Shares”). of Commitment Shares were issued and vested on the funding date of the MH Note 1. An additional Commitment Shares vest at a rate of shares per month.
The
MH Note 1 ranks as our senior unsecured debt. No security interests were granted to the Mast Hill. Mast Hill has certain rights that
may be exercised only upon an Event of Default. These rights include the right to exercise a warrant (a “Specified Lender Warrant”)
to purchase
We have agreed to reserve shares of our common stock for issuance to Mast Hill upon any conversion of the MH Note 1 or exercise of the related Specified Lender Warrant, which may be converted or exercised only after an Event of Default, equal to the product of number of shares that would be issued upon any such conversion or exercise multiplied by 1.25.
| 26 |
On
September 30, 2022, the Company closed an additional loan with Mast Hill under the terms of a Securities Purchase Agreement dated as
of September 28, 2022 and issued an unsecured promissory note in the principal amount of $
The
obligations under the MH Note 2 incur interest equal to
We paid the Mast Hill a commitment fee (“Commitment Fee”) of our common stock (“Commitment Shares”). of Commitment Shares were issued and vested on the funding date of the MH Note 2. An additional Commitment Shares vest monthly over the term of the MH Note 2.
The
MH Note 2 ranks as our senior unsecured debt. No security interests were granted to the Mast Hill. Mast Hill has certain rights that
may be exercised only upon an Event of Default. These rights include the right to exercise a warrant (a “Specified Lender Warrant”)
to purchase
We have agreed to reserve shares of our common stock for issuance to Mast Hill upon any conversion of the MH Note 2 or exercise of the related Specified Lender Warrant, which may be converted or exercised only after an Event of Default, equal to the product of number of shares that would be issued upon any such conversion or exercise multiplied by 1.25.
Debt Related to Assets Held for Sale
| 27 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Artesia Note
On
April 1, 2013, the Company executed a promissory note with FirstCapital Bank of Texas, N.A. for a principal amount of $
Leander Note
On
October 5, 2018, the Company executed a loan agreement with Equity Security Investments for a principal amount of $
Notes Payable
The Company has notes payable to Cibolo Creek Partners, LLC, its affiliate Round Rock Development Partners, LP. These notes have a maturity date of December 31, 2025, and there is no interest accruing on any of these notes. Each of these lenders was a related party when the obligations were incurred. For more information, see Note 9 - Related Party Transactions.
| 7. | Commitments and Contingencies |
Contingencies
The
tenant, MCA Simpsonville Operating Company LLC, referred to as Tenant, of the Simpsonville Facility, and other affiliates of the Company
have a dispute with the landlord of the Simpsonville Facility, MC-Simpsonville, SC-UT, LLC, referred to as the Landlord, and its affiliates
(Embree Group of Companies: Embree Construction Group, Inc., Embree Asset Group, Inc., and Embree Capital Markets Group, Inc., referred
to collectively as Embree) under the terms of the lease. After non-payment, the Landlord instituted litigation that is captioned and
numbered MC-Simpsonville, SC-UT, LLC v. Steve Person, et. al., Cause No. 19-0651-C368 in the 368th Judicial District Court of Williamson
County, Texas. After the trial court issued a judgment on damages in the amount of $
The Landlord filed a second action against Trident and the other guarantors on April 9, 2021, for claims similar to the action described above including relief for payment of rent past due and reimbursement of taxes from October 2020 to the time of the trial in this action. Trident and the other guarantors intend to respond to this action. The Company is not able to determine if it will prevail in such litigation. The Tenant entered into an agreement to transfer certain operations, including lease obligations, of the Simpsonville Facility. On August 5, 2022, in connection with the settlement of the action described above, Tenant and Landlord terminated the lease of the Simpsonville Facility as contemplated by such agreement to transfer of certain operations, including lease obligations, which permitted the Landlord to sell the Simpsonville Facility to a third party and thereby limit our future obligations. The Company and Landlord are negotiating a settlement, including the amount and payment terms. There can be no assurance that the Company will settle this second action on terms that are acceptable or at all. A hearing has been scheduled for December 8, 2022 to consider a proposed motion lift the stay of litigation and a trial may proceed if such motion is granted by the court.
| 28 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Certain
subsidiaries of the Company that operated hotel assets have not paid employment related taxes such as required withholdings for Texas
State unemployment taxes and federal income tax and employee and employer contributions for FICA (Social Security and Medicare) taxes,
and federal unemployment tax for the period from December 31, 2018 to December 31, 2020. These subsidiaries have since made the appropriate
filings with the Internal Revenue Service and the Company has accrued the full estimated amount of the underpaid taxes as well as the
estimated penalties and interest. As of September 30, 2022, the amount of the estimated taxes, penalties, and interest, assuming that
there is no waiver or mitigation of the penalties, is $
In the fourth quarter of 2021,
certain subsidiaries of the Company did not remit payroll taxes related to the Earned Retentions Tax Credit (“ERTC”).
The ERTC program permitted an offset for such obligations and was terminated during the fourth quarter with an effective termination
date of September 30, 2021. As a result, the Company has accrued $
Certain subsidiaries of the Company that operate our
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
period that ended September 16, 2022. These subsidiaries have since made the appropriate filings with the Internal Revenue Service and
the Company has accrued the amount of the underpayment in its unaudited condensed consolidated financial statements as of September 30,
2022 of approximately $
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; | |
| 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; | |
| 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; | |
| 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; | |
| 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 our Chief Executive Officer, and/or Christin Hemmens, is an officer. These actions are in the pleading or discovery stage of litigation. We cannot provide any assurance that we would prevail in any of these actions or that we would be able to settle any of these actions on favorable terms, if at all.
Indemnification Agreements
Certain
lease and other obligations of the Company are guaranteed in whole or in part by James Walesa and/or BJ Parrish and others. The
Company has agreed to indemnify and hold each such individual harmless for all liabilities and payments on account of any such
guaranty. The lease obligations of the Company for its lease obligations for four of its five MCA facilities, including the lease of
the MCA community that is located in Simpsonville, South Carolina, referred to as the Simpsonville Facility. This is the facility
that is the subject of litigation and judgement against certain of our subsidiaries. We have been fully indemnified by James Walesa
for all obligations that the Company may incur with respect to an adverse judgement against the Company, including any
post-judgement interest. Such indemnification by James Walesa is under an agreement dated as of July 30, 2020. Under such agreement,
James Walesa receives a fee equal to
Subsequently, an amendment to the indemnification agreement above was signed on January 19, 2021 in which additional securities were pledged on behalf of James Walesa for all obligations that Company may incur with respect to an adverse judgement and/or any post-judgement interest. In the event that Mr. Walesa is required to make any payments under this amended indemnification agreement, then Company will issue shares of AIU Care, AIU Warrants and AIU Common Stock at $ per unit as well as the AIU Series A Preferred at $ per unit, for the amount of such payment.
| 29 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
| 8. | Earnings Per Share |
Basic net income (loss) per common share is calculated by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of common shares and potentially dilutive securities outstanding for the period. For the Company’s diluted earnings per share calculation, the Company uses the “if-converted” method for preferred stock and convertible debt and the “treasury stock” method for Warrants and Options.
| Dilution shares calculation | For the Nine Months Ended September 30, | |||||||
| 2022 | 2021 | |||||||
| Series A Convertible Preferred Stock | ||||||||
| Series F 6.75% Convertible Preferred Stock | ||||||||
| Series I 10.25% Convertible Preferred Stock | ||||||||
| Limited Partnership Units | ||||||||
| Warrants | ||||||||
| Stock Options | ||||||||
| Total participating securities | ||||||||
| 9. | Related Party Transactions |
Background
The Related Party Disclosures Topic provides disclosure requirements for related party transactions and certain common control relationships. Accounting and reporting issues concerning certain related party transactions and relationships are addressed in other Topics.
Information about transactions with related parties is useful in comparing an entity’s results of operations and financial position with those of prior periods and with those of other entities. It helps users of financial statements to detect and explain possible differences.
Debt
There are some loans in which executive management has loaned money to the Company. In addition, there are loans made by the Company itself in which certain executives personally guarantee the debt.
Cibolo
Creek Partners, LLC (“Cibolo Creek”) and its affiliate Round Rock Development Partners, LP (“RRDP”) have from
time to time made loans to us under revolving credit notes that bear interest at the then applicable federal rate and are payable on
demand or other date that was specified by such lender. In December 2018, AIU acquired businesses affiliated with Cibolo Creek. As of
September 30, 2022, Cibolo Creek and Round Rock were owed $
| 30 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Guarantees
From
time-to-time certain officers and directors will personally guarantee a loan. There is a guarantee fee agreement in place that details
the amount of the fee as well as payment terms for certain executives in the Company. The amount of the fee is capped at
Other Transactions
On
February 18, 2022, MCA Naples, LLC (‘Seller’) executed a purchase agreement with Richard Morris, an executive vice president
of the Company, and Arlene Berliner, JTWROS (the “Purchaser”) to sell undivided interests in the land and improvements (the
“Naples Property”) that are used for its Memory Care of Naples care facility that is in Naples, Florida (the “Naples
Facility”) for aggregate cash amount of $
Related
parties of the Company, including our Chief Executive Officer, have from time to time made as unsecured non-interest bearing advances
that are due upon demand. As of September 30, 2022, the balance of such advances from officers were an aggregate amount of approximately
$
| 10. | Deficit |
The certificate of incorporation of Clearday, Inc., as amended in connection with the merger, provides for authorized shares of Common Stock and authorized shares of preferred stock, each par value $ per share.
Liquidation Preference
In the event of the Company’s liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of the Company’s debts and other liabilities and the satisfaction of any liquidation preferences that may be granted to the holders of any then outstanding shares of preferred stock.
Preferred Stock
Prior to the AIU Merger, AIU had Series A 6.75% cumulative convertible preferred stock, $ par value, shares of such securities were issued and outstanding as of December 31, 2021. Each share of Series A preferred stock has a stated value equal to the Series A original issue price. The conversion rate to the number of shares of AIU common stock is equal to 1 share for each share of Series A preferred stock. In connection with the securities, they were either converted into AIU common stock and then exchanged for the Company Common Stock or exchanged for shares of the Company’s Series F 6.75% cumulative convertible preferred stock, $ par value. The Company has shares authorized with and issued and outstanding as of September 30, 2022 and December 31, 2021, respectively. The Series F Preferred Stock has a stated value of $ per share is exchangeable at the option of the holder into approximately 2.38 shares of the Company’s Common Stock, subject to adjustment for specified fundamental transactions such as stock splits, reverse stock splits and stock combinations. See Note 11 - Preferred Stock – Temporary, for accounting treatment of the Series F Preferred Stock.
The
Series A Preferred Stock of the Company that was issued and outstanding prior to the merger remains issued and outstanding. Such
preferred stock has a $
par value,
shares authorized, and
shares issued and outstanding as of September 30, 2022 and December 31, 2021. Except for a preference on liquidation of $
| 31 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Dividends and Distributions
For
the three and nine months ended September 30, 2022, the Company recognized dividends for the 6.75% Series F
preferred stock in the amount of $
Warrants
The Company has two separate types of warrants that are outstanding: (1) the warrants that were granted and outstanding by STI prior to the effective date of the merger and (2) the warrants assumed by the Company that were granted by AIU prior to the effective date of the merger.
STI Warrants Prior to the AIU Merger Effective Date.
The following is a summary of such outstanding warrants at September 30, 2022:
| Common Shares | ||||||||||||||
| Total | Currently Exercisable | Exercise Price per Share | Expiration Date | |||||||||||
| Warrants related to March 2018 financing | $ | |||||||||||||
| Warrants related to March 2018 financing | $ | |||||||||||||
| Warrants related to July 2018 financing | $ | |||||||||||||
| Warrants related to July 2018 financing | $ | |||||||||||||
| Warrants related to May 2019 financing | $ | |||||||||||||
| Warrants related to October 2019 financing | $ | |||||||||||||
| Warrants related to October 2019 financing | $ | |||||||||||||
| Warrants issued by AIU that after the merger (described below) | $ | |||||||||||||
| Warrants issued by AIU for a consultant | $ | |||||||||||||
In
addition, the Company issued warrants (“Specified Lender Warrants”) to Mast Hill to purchase
Warrants that were issued by AIU have been assumed by Clearday in the merger.
As
of September 30, 2022, there are
| 32 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Prior
to the closing of the merger, AIU issued to a consultant that is subject to a development agreement a warrant representing shares
of the Company’s Common Stock as of the effective date of the merger at an exercise price of $
Stock Options
As of September 30, 2022, there are no outstanding options under the Stock Option Plan.
Restricted Stock
For the nine months ended September 30, 2022, shares of restricted common stock were issued to two professional service firms for investor relations work.
Equity of Subsidiary
Non-Controlling Interest
In
November 2019, a certificate of incorporation was entered into by AIU Alt Care for Series I 10.25% cumulative convertible preferred stock,
par value $ per share that authorizes the issuance of shares of preferred stock and of common stock and designated
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 Months ended September 30, 2022 and 2021, $
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. Based on
Cumulative Convertible Preferred Stock and Limited Partnership Interests in Subsidiaries (NCI)
For
the nine months ended September 30, 2022, AIU Alt Care closed subscriptions and issued and sold shares of Series I Cumulative Convertible
Preferred Stock (the “Alt Care Preferred Stock”), par value $ per share, and units of limited partnership interests
in Clearday OZ Fund. However, the dividends on the series I shares for the quarter ended September 30, 2022 totaled $
The
terms and conditions of the Alt Care Preferred Stock and the limited partnership interests in the Clearday OZ Fund allow the investors
in such interests to exchange such securities into the Company’s common stock at the then Company common stock price. For the nine
months ended September 30, 2022, AIU Alt Care and Clearday OZ fund has issued
Each
warrant has a term of
| 33 |
Clearday, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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 (
Each of the Company, Alternative 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 of 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. | Preferred Stock – Temporary equity |
The Company has shares of preferred stock authorized, par value $ per share, including designated as Series F Preferred Stock and shares outstanding as of September 30,2022. Pursuant to the Certificate of Designations of Series F 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 Preferred Stock that a transaction is not a Deemed Liquidation Event, the holders of the then outstanding Series F 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 and, 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 Preferred Stock does not qualify as permanent equity and has been classified as temporary equity. The Series F Preferred Stock is not redeemable, and it was not probable that there would be a Liquidation Event as of September 30,2022. Therefore, the Company is not currently required to accrete the Series F Preferred Stock to the aggregate liquidation value.
| 12. | Income Taxes |
The
Company did
The Company evaluates its deferred tax assets on a quarterly basis to determine if a valuation allowance is required based on whether it is more likely than not that some portion of the deferred tax asset would not be realized. The Company has assessed its position and decided that a valuation allowance as of September 30, 2022 and September 30, 2021 is not necessary at this time.
| For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Current tax provision (benefit): | ||||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| Total current tax benefit | ||||||||
| Less Valuation Allowance | ) | |||||||
| Total | ||||||||
| 13. | Subsequent Events |
We evaluated subsequent events and transactions occurring after September 30, 2022 through the date of this Report.
Issuance of Shares.
We issued shares of common stock for compensation for financial services performed.
Real Estate Loan
We
received a payment from a private investor of $
| 34 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the unaudited condensed 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 Clearday, its plans, and strategy for its business and related financing, includes forward-looking statements that involve risks and uncertainties. References in this Item 2 to AIU refers to the business of Allied Integral United, Inc. that was continued after the AIU Merger, unless otherwise indicated. The following discussion uses the term Clearday to mean the business and operations of AIU prior to the AIU Merger together with certain businesses of Superconductor continued after the merger, unless otherwise indicated.
General Industry Trends.
The Company’s strategy is to provide innovative non-acute care and wellness solutions that disrupt the traditional senior care model primarily virtually through digital channels with its Clearday at Home service, that it developed during 2020 and launched in the first quarter of 2021 through consumer and business to business (B2B) sales channels, and through its facilities. The Company owns and operates four residential memory care facilities and an adult day care center that are located in three U.S. states, under the Company’s subsidiary, Memory Care America or “MCA”. The MCA facilities focus on treating residents suffering from any of the 25 forms of dementia that may be treated in a residential care facility, Alzheimer’s being the most common. The Company uses its knowledge and its experience in treating dementia and other cognitive disorders to develop technology-enabled businesses, aligned to next-generation non-acute care and wellness services and products, including adult day care and home care products and services.
During the nine months ended September 30, 2022, we continued developing the next generation of tech-enabled non-acute care and wellness solutions, including the deployment and development of robots through its previously announced joint venture. As of the date of this Report, we offer robotic services that focus on engagement and assist staff or caregivers. The robotic services provide enhanced care to residents through a range of engagement focused applications, including our proprietary streaming services, games, music and other digital services. The robotic services also include safety services such as fall detection, assisting in rounding and alerts to staff. We have begun marketing the robots to third parties for use in their residential care facilities and to others for home care applications to diversify and expand our revenue streams. One market for use of our robotic services is skilled nursing care facilities, which may have access to a variety of funding sources, including government reimbursement programs, so for the purchase or rental of our Mitra Robot and related services. We believe that robotic services enable care to move from the traditional 1:1 ratio (a caregiver providing services to one person at a time) to a 1:many ratio (a caregiver providing services to more than one person at a time, while continuing to provide excellent care). We are also continuing improvements to our residential care facilities with our Clearday Stay rooms that provide premium furnishings and services. We believe that market for robotic services should continue to expand as industry participants continue to use and leverage technology for long term care and governments continue to evaluate the funding of innovative technologies, such as the legislation recently introduced in the U.S. Congress, the Innovative Cognitive Care for Veterans Act of 2022, that would provide funding to the Veterans Administration for a pilot program to use innovative care. We are also supporting our marketing of robotic services by adding sales focused executives. Additionally, we expect to work with a leading public university academic health center to study the benefits of our robotic services with patients at home challenged by geriatric syndrome, a term that is often used to refer to common health conditions in older adults that do not fit into distinct organ-based disease categories and often have multifactorial causes, including conditions such as cognitive impairment, delirium, incontinence, malnutrition, falls, gait disorders, pressure ulcers, sleep disorders, sensory deficits, fatigue, and dizziness. We are currently negotiating the terms of a memorandum of understanding with this academic health center in which they would purchase Mitra robots for a peer review study and expect to finalize this agreement during the fourth quarter. Although the primary investigator of this study supports the purchase and use of the Mitra robots, there can be no assurance that we will be able to enter into this memorandum of understanding on acceptable terms or at all.
Clearday has two business segments:
| ● | Non-Acute Care and Wellness, is Clearday’s operating business including: |
| - | Clearday’s innovative non-acute care and wellness services and products, including a virtual service delivered through digital channels; | |
| - | Clearday’s existing MCA communities, including adult day care; | |
| - | Further development and commercial sales of robotic technologies; | |
| - | Commercialization of its advanced air quality products; and | |
| - | All of Clearday’s general and administrative and research and development functions. |
| ● | Non-Core Assets and Related Businesses, which includes all of the assets that are held for disposition. |
All net proceeds from dispositions of the non-core assets and related businesses since the 2018 Acquisition have been used by Clearday for its working capital and to fund the development of its innovative non-acute care and wellness businesses.
All of the Company’s long-lived assets are located in the United States and, during the nine months ended September 30, 2022 and 2021, respectively, all of the Company’s revenue was derived from within the United States.
| 35 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Seasonality.
MCA’s residential care facilities are seasonal in nature. Generally, residential care facilities suffer revenue losses in the Winter months.
Results of Operations.
Our operating revenues are predominately from our four residential memory care facilities and our adult day care center (our “Facilities”). Our residential care Facilities earn revenue primarily by providing services to individual residents for a specified monthly fee, which fee includes all services such as room, meals, and programs and to a lesser extent, certain community fees for a resident to move into a facility. All such revenues 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 daycare Facility earns revenues primarily by providing services to individual clients for weekday sessions, which includes activities. A part of our revenues includes reimbursements to veterans under a program by the United States Department of Veterans Affairs (VA).
Our operating expenses are primarily the expenses of our facilities described below as well as the expenses that we incur in our digital platform.
Certain costs and expenses incurred by the Company are accounted for as Selling, General & Administrative Expenses (“SG&A”), including costs and expenses that are summarized below, which we have continued to decrease significantly since from January 1, 2020. We believe that disclosure of such amounts would be useful to the analysis of our financial statements.
These SG&A Expenses during the nine months ended September 30, 2022 include:
(1) Development capitalized costs and expenses for the innovative services, including Clearday at Home, which primarily consisted of payments to a third-party consulting firm to develop the Clearday at Home and Clearday Club business models, strategies, branding and marketing, and to a lesser extent, the employment costs of the Company personnel dedicated to such development activities. For the nine months ended September 30, 2022 and 2021, these amounts were approximately $1.2 million and $1.55 million (including costs related to research and development of products and services), respectively. The decrease is primarily because of we completed a material amount of development related to our robotic service and our digital platform used for Clearday at Home and related digital services during this period and we capitalized a certain amount of payments during this period. We may incur other development expenses through our Clearday Labs for the development of other products and services to the extent that such amounts are not funded by others through our strategic alliances.
(2) Accounting and finance expenses related to the AIU Merger, which primarily consisted of accounting and consulting fees incurred to improve the accounting and finance department, the additional consulting fees regarding the audit and preparation of our financial statements. For the nine months ended September 30, 2022 and 2021, these costs were approximately $381,786 and $963,641 respectively. While some of these expenses will continue, such as audit fees, we have reduced our reliance on third party accounting consultants as we have increased the number and skill set of our accounting and financial staff. These costs included approximately $542,000 of costs and expenses paid to third party accounting consultants during the three and nine months of 2021 reduced to approximately $90,000 during the three and nine months ended of 2022 or a decrease of $452,000 because we significantly reduced our use of such consultants beginning December 2021, which amount was, offset in part by our increase in the compensation expense for our financial accounting staff.
(3) Equity based compensation, which primarily consisted of restricted stock grants and warrants to the Company’s executives and third-party consultants. For the nine months ended September 30, 2022 and 2021, these amounts were $0 and $689,912, respectively.
Our operating expenses for our Facilities are primarily related to providing care to our residents and customers, including:
| ● | wages and benefits, including wages and wage-related expenses, such as health insurance, workers’ compensation insurance and other benefits for the employees, including management; | |
| ● | facility operating expenses, including utilities, housekeeping, dietary, maintenance, regulatory requirements, insurance and administrative costs and salaries, including the compensation to persons who develop, market and provide our innovative products and services; | |
| ● | lease expenses; | |
| ● | other general and administrative expenses, principally comprised of general management including the Company’s headquarters, general insurance, legal, accounting and investments in technology; | |
| ● | depreciation and amortization expense on buildings and furniture and equipment; | |
| ● | interest expenses for loans and other financings related to these businesses; and | |
| ● | other expenses for the development of technology used in supporting operations and next generation of tech-enabled non-acute care and wellness solutions |
| 36 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Key statistical data for the nine months ended September 30, 2022 and 2021:
A significant amount of our expenses during the nine-month period ending September 30, 2022 are allocated to our Facilities. We ceased operating our Simpsonville Facility as of September 30, 2021 and acquired an adult day care center during the second quarter of 2021. The following tables present a summary of our operations for the nine months ended September 30, 2022 and 2021 (dollars in thousands, except per unit amounts) for our Facilities, other than the Simpsonville Facility, which we ceased operating as of September 30, 2021 and for comparative purposes has been excluded during both periods.
Nine Months Ended (Facilities*) | Increase/(Decrease) | |||||||||||||||
| September 30, 2022 | September 30, 2021 | Amount | Percent | |||||||||||||
| MCA Resident Facilities | $ | 9,139 | $ | 8,946 | $ | 193 | 2.16 | % | ||||||||
| Operating expenses: | ||||||||||||||||
| Wages and benefits | 6,021 | 5,940 | 81 | 1.36 | % | |||||||||||
| MCA facility operating expenses | 1,918 | 1,626 | 292 | 17.96 | % | |||||||||||
| Lease expenses | 2,689 | 2,858 | (169 | ) | (5.91 | )% | ||||||||||
| Impairment | - | 1,501 | (1,501 | ) | (100 | )% | ||||||||||
| Other general & administrative expenses | 1,482 | 1,236 | 246 | 19.90 | % | |||||||||||
| Research & development expenses | - | - | - | - | % | |||||||||||
| Depreciation and amortization | 160 | 218 | (58 | ) | (26.61 | )% | ||||||||||
| Total operating expenses | 12,270 | 13,379 | 266 | (8.29 | )% | |||||||||||
| Operating loss | (3,131 | ) | (4,433 | ) | 1,302 | (29.37 | )% | |||||||||
| Other (income) expenses | ||||||||||||||||
| Interest | 1,240 | 268 | 972 | 362.69 | % | |||||||||||
| Other (income) expenses | (891 | ) | (492 | ) | (399 | ) | 81.10 | % | ||||||||
| Total other/(income) expenses | 349 | (224 | ) | (573 | ) | 255.80 | % | |||||||||
| Net Loss | (3,480 | ) | (4,209 | ) | 729 | (17.32 | )% | |||||||||
| * | We did not operate the Simpsonville Facility from and after September 30, 2021. This table does not include the financial statistics related to such facility for the periods presented. |
| 37 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Revenue. Revenue from our Facilities increased by approximately 2.2%, or approximately $0.19 million, primarily due to revenues from our adult day care center that we acquired in the second quarter of 2021, as well as increased revenues from our residential Facilities primarily due to a small increase in residents during these periods and increased average rates, offset in part by promotional discounts. During the first nine months of 2022, we provided promotional discounts for early payment of resident fees that were used to finance, in part, our operations and growth initiatives including our robotic services and Clearday at Home. Such amounts were approximately 1.7% or our revenues during this period. If such discounts were not provided, then our revenue from our Facilities would have increased by approximately $0.34 million or approximately 3.8%.
Wages and Benefits. Wages and benefits increased by 1.3%, or approximately $0.08 million during the first quarter of 2022 compared to 2021, primarily due to increased labor related to our adult day care center which we acquired and began to operate at the end of the second quarter of 2021, as well as increases related to our residential care Facilities, primarily due to increased staffing costs mostly related to nursing staff, and to a smaller extent increase of outside agency staff. We believe that our increase in wages and benefits reflect the conditions in the residential care sector generally, including factors such as less labor that is available due to the Great Resignation in the U.S. and other factors. We have reduced our use of outside agency staff significantly from April, 2022, primarily due to better staffing and scheduling of our care persons. Although there can be no assurance that we will continue to be able to avoid using outside agency staff, we expect to continue to be able to maintain our lower use of outside agency staff after April, 2022.
Facility Operating Expense. Facility operating expenses increased by 17.96% or approximately $0.29 million, primarily due to a increases in food costs and supplies which were subject to inflationary pressures. We believe that our increase in food costs and supplies reflect the conditions in the residential care sector generally, including factors such as less inflation and supply chain disruptions. We continue to evaluate our increased costs and may seek to offset such increased costs by increasing our rates for our services to the extent that such increases are acceptable to market conditions.
Lease Expenses. Lease or rent expenses decreased by approximately 5.9%, or approximately $0.169 million primarily due to one month of rent that was over-accrued in 2021 and Simpsonville lease expense that was subsidized by under the Simpsonville Transfer Agreement.
Other General and Administrative Expense. Other general and administrative expenses increased by approximately 19.9% or $0.24 million, primarily due to other professional services expenses related to the loan broker fees and travel costs and accounting services at the facilities offset in part by lower insurance cost.
Depreciation and Amortization. Depreciation and amortization decreased by approximately 27% or approximately $0.058 million primarily due to lower remaining net capitalized asset balances for leasehold improvements being subject to depreciation during this period.
Interest Expense. Interest expense increased by 362.69%, or approximately $0.97 million primarily due to higher interest expenses due to our financing of operating and other expenses through merchant cash loan facilities, offset in part by the repayment of other financings. We incurred these high interest rate financings in large part because we were not able to access the equity capital markets and in advance of our expected cash payments under the ERTC and the Families First Coronavirus Response Act (the “FFCRA”), as amended by the COVID-related Tax Relief Act of 2020, as well as expected lower compensation expenses by our ability to use federal tax credits available under the federal Work Opportunity Tax Credit (WOTC). We used the additional financing to fund operations as well as developing innovative care solutions, including our digital services and robotic services. We continue to seek equity financing with institutional parties. However, there can be no assurance that such equity capital financing facilities would be available on acceptable terms or at all.
| 38 |
Expenses Not Allocated to the Facilities:
Our operating and other expenses that are not allocated to our Facilities or the Simpsonville Facility, included the following:
Operating Expenses
Operating expenses increased by a net amount of approximately 2% or approximately $0.02 million, primarily because of corporate compensation expenses and to a lesser extent, advertising and marketing and property taxes. Corporate compensation expense increased by approximately 1% or approximately $0.06 million. Of this amount, (1) approximately $0.04 million was due to a reallocation of compensation attributable to persons in discontinued operations during the first nine months of 2021 to corporate services during the first nine months of 2022 these allocation make-up $0.02 million in corporate compensation during the first quarter of 2022, (2) increase of corporate staff, including business development and persons dedicated to our streaming services. We increased our accounting and financial staff to lessen our reliance on accounting consultants, which as described below, resulted in a reduction of approximately $0.32 million of such expenses.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses decreased by a net amount of approximately 76.84% or approximately $6 million, primarily because there was $1.9 million of equity-based compensation recorded during 2021 and no equity based compensation expense during the second quarter of 2022, and a reduction of legal & accounting services of approximately $1, of which approximately $0.44 of this decrease was attributable to accounting consultants. There was also a $2.6 million transaction cost to for investment banking fees related to our merger that closed on September 9, 2021 See Note 6 for additional information.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased by approximately 16.04% or $0.03.
Other (Income) Expenses
Other income Increased by a net amount of approximately $6.18 million, primarily because primarily due to gains recorded in 2021 of $2.09 million and the writing off of Simpsonville intercompany transactions of $6.11 million in September 2022.
Simpsonville Facility
We ceased operating our Simpsonville Facility as of September 30, 2021 and terminated the lease in August, 2022. During the nine months ending September 30, 2022, we recognized an aggregate net loss attributable to the Simpsonville Facility of approximately $0.65, primarily due to the continued accrual of lease expenses related to this Facility in the amount of approximately $0.63 million, offset by other income related to employee retention tax credit (“ERTC”) for certain employees under the CARES Act. As disclosed in our Current Report on Form 8-K filed on September 15, 2021, we entered into an Operations Transfer, Interim Management and Security Agreement (the “Simpsonville Transfer Agreement”) with Brookstone Terrace of Simpsonville, LLC (“Brookstone”) and, as described in Note 7 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report, we terminated this lease with the landlord in connection with the settlement of a litigation. Until the date of such lease termination, we continued to accrue the lease expense. The base rent attributable to this Facility was 97,490 per month, subject to a 2% increase commencing June 1, 2022, offset by a $30,000 monthly credit under the Simpsonville Transfer Agreement payable by Brookstone that began on May 1, 2022. The Simpsonville Facility operated at a loss, and we expect the lease termination will improve our future operating results.
| 39 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Concentration of Risk—Revenues
The Company’s revenue for the nine months ended 2022 and 2021 primarily consist of operations from our Facilities that are located in four states. The Company expects to continue to be dependent on revenues from the Facilities until the other planned businesses have revenues. Any failure of the Facilities to continue these businesses would significantly and adversely impact the Company. The revenues are primarily private pay and do not rely on reimbursements from Medicare or Medicaid. The Company expects that such concentration will continue until revenues are realized from its digital service Clearday at Home, its robot services and additional revenues from adult day care services.
Non-Core Assets
The Company considers all its assets that are not used in the non-acute care and wellness industry as non-core assets. The non-core assets as of September 30, 2022 are commercial real estate investments, including land investments. The Company continues to evaluate the manner to sell or otherwise monetize such assets.
Disposition Activities
During the nine months ended September 30, 2022, the Company sold one non-core asset, an unimproved land of approximately 2 acres of property located in Cibolo, Texas that was held as non-core assets for an aggregate gross amount of $980,000 that was sold on September 30, 2022. The sale of such land is part of our previously disclosed course of business to sell or otherwise monetize assets non-core assets, which are the assets (1) acquired by Clearday Operations, Inc. (formerly, Allied Integral United, Inc.), on December 31, 2018, when it began its business and that (2) are not related to our memory care facilities or our non-acute care and wellness industry.
The COVID-19 pandemic has slowed the ability of the Company to dispose of its remaining non-core assets and lowered the expected price of such remaining assets. The Company recently has received an offer to sell one of its non-core assets, an investment in land, and expect to continue its efforts to sell its non-core assets to fund its operations.
Revenues of the Non-Core Assets
The Company primarily derived revenues from Non-Core Assets from rents and related charges.
Liquidity and Capital Resources
We require cash to fund our current operations and continued innovation of non-acute care and wellness services. Our strategy is to use the net proceeds from the sale of our remaining non-core assets and the capital that we raise to fund such operations and activities. The COVID-19 pandemic and other factors, including the increase of interest rates generally have delayed the non-core sale process and reduced our expected net proceeds and are expected to increase our cost of additional financings.
We do not have sufficient cash resources from the net cash flows of operations, from our current operations, to sustain our operations for the next twelve months and will rely on the continued sale of non-core assets and the sale of its securities and additional financings. We have agreed to defer the cash payment of certain amounts under the lease of our residential care facilities: we have deferred the payment of October rent to December 8, 2022; deferred the payment of November and December rent to January 9, 2023; and deferred the payment of January rent to February 7, 2023.
Additionally, we have applied for certain tax credits in the aggregate amount of approximately $315,000 and expect to apply and be eligible for an additional amount of tax credits of approximately $500,000.
We have been able to obtain additional financing of the equity of our non-core assets during the third quarter and the fourth quarter of more than $500,000. We continue to seek financing of the equity in our remaining non-core assets with institutional and private lenders. However, there can be no assurance that such financings will be available on acceptable terms or at all. We have engaged an investment banker and are negotiating with institutional investors for an equity investment in us, in an amount that we believe would enable us to fund our liabilities, including payments to our creditors. During the fourth quarter, we received and are evaluating a non-binding letter of intent for one such investment transaction. However, there can be no assurance that any such equity investment will be available on acceptable terms or at all.
| 40 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our results of operations, financial condition and cash flows are dependent on future developments, including the duration of the pandemic and the related length of our impact on the global economy, such as a lengthy or severe recession or any other negative trend in the U.S. or global economy and any new information that may emerge concerning the COVID-19 pandemic and the actions to contain it or treat our impact, which at the present time are highly uncertain and cannot be predicted with any accuracy.
We expect that the following factors will affect our future operating liquidity:
| ● | Operating revenues are expected to be affected, primarily because of |
| - | Our ability to increase residents through increased sales efforts, subject to regulatory requirements including those related to COVID-19 quarantine areas; | |
| - | Increased revenues from adult daycare, including a full year of revenues from our acquired adult daycare facility and our ability to increase residential fees; | |
| - | Our ability to increase revenues by providing certain additional products and services to residents, and clients through our Clearday Direct program, including our robotic services to facilities and the consumer or home market; and | |
| - | Any discounts or promotions that we may provide. |
| ● | Operating costs are expected to be affected, primarily because of: |
| - | Our ability to reduce the staff to resident ratios in the post-COVID-19 environment and that our Clearday Clubs require less staff to client ratio; | |
| - | Our ability to reduce staff turnover through better training and recruitment; | |
| - | The expiration of the Employee Retention Credit under the CARES Act, and our ability to utilize the Work Opportunity Tax Credit (WOTC) | |
| - | Increased pressures on wages and agency fees due to industry staffing shortages; | |
| - | Additional interest expenses related to our high interest loans that we have incurred during 2022, offset in part by expected refinancing of certain mortgages and debt and the receipt of other financings such as SBA sponsored programs and additional amounts that we expect to receive through tax credits; | |
| - | Reduced net losses related to our Simpsonville Facility; and | |
| - | The amount of payments to our creditors and others related to our contingencies. |
| ● | Selling and general administrative costs will be affected and are expected to decrease, primarily because: | |
| - | Development costs that are recorded as operating expenses related to additional products and services developed through our Clearday Labs. | |
| 41 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MCA Initiatives
As business operations for residential care facilities began to normalize in the COVID-19 environment, we continued our evaluation of our businesses. We expect to:
| ● | Expand the marketing and sales of robotic services; | |
| ● | Continue our sales and marketing training to maintain and increase resident or census occupancy percentages per available room in our Facilities; | |
| ● | Increase revenues per resident through the sale of innovative products and services, including Clearday Calm Rooms and digital and robotic services, as well as other revenue opportunities; | |
| ● | Use innovative services such as digital platforms and robotic service to empower and enhance caregiver efficiency and effectiveness which are intended to reduce employee / caregiver stress and turnover. |
COVID-19. The pandemic and the regulatory responses and additional initiatives have and will likely continue to have a material effect to Company’s core businesses and operations.
Funding History
Clearday historically financed its operations primarily through the sale of its equity securities in private placements and borrowings prior to the AIU Merger and through debt financings and merchant cash loan facility transactions after the AIU Merger. Clearday has incurred negative cash flows from operations.
Cash Flows
The following table ($ in 000) shows a summary of Clearday’s cash flows for the nine months ended September 30, 2022 and 2021:
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in activities of continuing operations | (2,263,858 | ) | (2,276,797 | ) | ||||
| Net cash provided by (used in) operating activities of discontinued operations | - | 155,834 | ||||||
| Net cash used in operating activities | (2,263,858 | ) | (2,120,963 | ) | ||||
| Net cash used in investing activities of continuing operations | (28,310 | ) | (506,720 | ) | ||||
| Net cash used in investing activities | (28,310 | ) | (506,720 | ) | ||||
| Net cash provided by continuing operations | 1,327,093 | 3,053,444 | ||||||
| Net cash used in financing activities of discontinued operations | (201,552 | ) | (492,428 | ) | ||||
| Net cash provided by in financing activities | 1,327,093 | 2,561,016 | ||||||
Operating Activities
Net cash used in operating activities was $2.2 million for nine months ended September 30, 2022, and $2.1 million for the nine months ended September 30, 2021. Net cash used in continuing operations for the nine months ended September 30, 2022 resulted from a net loss of $5.2 million adjusted for certain non-cash items including: (i) depreciation and amortization of $0.51 million, and (ii) amortization of debt cost of $0.84 million
Investing Activities
Net cash provided in investing activities was $0.33 million for the nine months ended September 30, 2022, and net cash provided of $.5 million for the nine months ended September 30, 2021.
| 42 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financing Activities
Net cash provided by financing activities was $1.3 million for the nine months ended September 30, 2022. Net cash provided by financing activities for the nine months ended September 30, 2022, consisted primarily of net proceeds received from merchant cash loan facilities and the loans from institutional lenders.
Government Programs
We participated in ERTC program and expect additional cash payments under the ERTC. 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.
Contractual Obligations and Commitments
See the “Commitment and Contingencies” section within Note 7 of the unaudited condensed consolidated financial statements within this Report, which information is incorporated herein by reference.
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 to the financial statements – Commitments and Contingencies.
Off-Balance Sheet Arrangements
Clearday is not a party to any off-balance sheet transactions. Clearday has no guarantees or obligations other than those which arise out of normal business operations.
Cash and Restricted Cash
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.
Restricted cash as of September 30, 2022 and December 31, 2021 includes 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.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of the unaudited 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 different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition, Results of Operations – Critical Accounting Policies and Estimates” and the notes to our unaudited condensed consolidated financial statements included in this quarterly analysis.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
During the nine months ended September 30, 2022, there were no significant changes in our accounting policies and estimates other than the newly adopted accounting standards that are disclosed in Note 2 to our unaudited condensed consolidated financial statements.
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 The Company believes adequate to protect the Company from material damages and losses resulting from the consequences of losses caused by climate change. However, the Company cannot be sure that its 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.
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 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 or in the beginning of the first quarter of 2022. 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 not been 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 Months ended September 30, 2022 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 to our unaudited condensed 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. | On September 22, 2022, 180,000 shares to Alliance Equity Capital Group Inc. for marketing services to be provided by such person. | |
| 2. | On September 27, 2022, 100,000 shares to Dutchess Group for marketing services to be provided by such person. | |
| 3. | On October 4, 2022, 54,345 shares Dickson Co for accounting services that were provided by such person. |
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 $2,925,195, as summarized in Part I, Item 1 Note 6 – Indebtedness. During the fourth quarter of 2022, 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.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit No. |
Description | |
| 10.1 | Property Sale Proceeds Advance Agreement dated as of November 21, 2022 by and among Leander Associates, Ltd. and KOBO, LP | |
| 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: November 21, 2022 | /s/ John Bergeron |
| John R. Bergeron | |
| Chief Financial Officer | |
| /s/ James T. Walesa | |
| James T. Walesa | |
| President and Chief Executive Officer |
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