Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
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1.
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Organization,
Description of Business, Basis of Presentation, Summary of Significant Accounting Policies, Liquidity and Going Concern
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Description
of Business
Clearday,
Inc., a Delaware corporation (the “Company”), formerly known as Superconductor Technologies Inc., was established in 1987
and closed a merger with Allied Integral United, Inc., a Delaware corporation (“AIU”), on September 9, 2021. This merger
was described in our registration statement (“Merger Registration Statement”) on Form S-4, as amended and supplemented
(Registration No. 333-256138). Prior to the closing of the merger, the Company was a leading company in developing and commercializing
high temperature superconductor (“HTS”) materials and related technologies. As described in the Merger Registration Statement,
after the merger, the Company continued the businesses of AIU and continued one of 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 certain private funds that operate five (5) memory care residential facilities and other
businesses (the “2018 Acquisition”), including commercial real estate and hospitality assets from related parties.
The memory care business is conducted through the 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 5 years.
Since the 2018 Acquisition, the Company has been developing innovative care and wellness products and services focusing on the longevity
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, 2021 and
December 31, 2020. 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, 2021 and
2020.
On
March 11, 2020, the World Health Organization declared the outbreak of COVID-19, which spread throughout the U.S. and the world, as a
pandemic and has had a significant impact on the global economy, resulting in rapidly changing market and economic conditions. National
and local governments around the world instituted certain measures, including travel bans, prohibitions on group events and gatherings,
shutdowns of certain non-essential businesses, curfews, shelter-in-place orders and recommendations to practice social distancing. The
governmental response includes additional protocols for the health and safety of residents and staff in the Company’s facilities.
The outbreak and associated restrictions on travel that have been implemented have had a material adverse impact on the Company’s
business and cash flow from operations, similar to many businesses. The Company has begun, and intends to continue, to resume normal
operations as soon as practicable. However, the Delta Variant of the COVID-19 has become the predominant COVID-19 strain in the United
States and has put a renewed focus on prevention and has caused many governments and other authorities to re-institute preventive measures
to mitigate the risk of hyperlocal outbreaks. The total impact of COVID-19 is unknown and may continue as the rates of infection, including
of the Delta Variant, have increased in Texas and many other states in the U.S. As a result, management has concluded that there was
a long-lived asset impairment triggering event during 2020 and 2021, which required management to perform an impairment evaluation.
See Note 5 – Discontinued Operations for additional discussion and results.
As
noted above in the Introductory Note, this Report is the first Quarterly Report on Form 10-Q by the Company after the merger. Accordingly,
this is the first Quarterly Report on Form 10-Q by the Company that includes the businesses conducted by AIU prior to the merger. Additionally,
this Quarterly Report on Form 10-Q by the Company uses a date for the quarter end that is the last day of the calendar quarter or September
30, 2021 which is a change of the quarter ended date that was previously used. The Company has assessed the change of the fiscal
quarter ending dates and believes that the change in quarter ending dates by the Company has not had a material impact on the financial
results for the quarter ended provided in this Report and improves the comparability between fiscal periods.
Merger
between Allied Integral Untiled, Inc and AIU Special merger Company, Inc and Name Change
On
September 9, 2021,
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The
merger that was described in the Merger Registration Statement was completed.
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In
connection with, and prior to completion of, the Merger, the Company (1) effected a 3.773585
-for-1 share reverse stock split (the “Reverse
Stock Split”) of its Common Stock resulting in a decrease of outstanding shares of common stock from 2,751,780 to
approximately 729,222; and (2) changed its name to “Clearday, Inc.”
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A
special distribution for the issuance and delivery of additional shares of its common stock (“True Up Shares”) to the
holders of its shares of Clearday Common Stock of record as of 5:00 pm Eastern Time on September 9, 2021 was declared,
which provided for the distribution of an aggregate amount of approximately 546,820
shares of such Common Stock (representing
a dividend rate of approximately 0.749868);
such shares were distributed on or about September 20, 2021.
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Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Under
the terms of the merger:
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There
was an increase in the number of shares of AIU common stock (2:1), 50% of the shares of AIU’s 6.75% Series A Cumulative Convertible
Preferred Stock were converted into AIU common stock and then the shares of AIU common stock were exchanged for shares of Clearday, Inc.
Common Stock at an exchange ratio of approximately 1.192
shares of Common Stock for each share
of AIU common stock;
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Each
share of AIU’s 6.75%
Series A Cumulative Convertible Preferred Stock that was not converted into AIU common stock were exchanged for an equal number
of a new series of preferred stock issued by Clearday, par value $0.001
per share that are designated Clearday 6.75%
Series F Cumulative Convertible Preferred Stock (“Series F Preferred”), which provide substantially similar terms as
the AIU Series A Preferred, except that such preferred stock will convert to that number of shares of the Clearday’s Common
Stock after giving effect to the exchange ratio used in the Merger or 2.384675 shares of Common Stock issuable upon the exchange
of 1 share of Series F Preferred;
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The
Company assumed the obligations of the warrants issued by AIU so that such warrants now represent the right to be exercised for shares
of the Clearday’s Common Stock equal to approximately 3,781,509 shares;
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Clearday
assumed the obligation to issue its shares of Common Stock with respect to the (1) 10.25%
Series I Cumulative Convertible Preferred Stock issued by AIU Alternative Care, Inc., a subsidiary of AIU, and (2) units of limited
partnership interest of Clearday Alternative Care OZ Fund LP, a subsidiary of AIU Alternative Care, Inc., which as of the effective
date of the merger was equal to approximately $15,253,740 of investment and accrued dividends.
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The
merger was accounted for as a reverse asset acquisition in accordance with generally accepted accounting principles in the United States
of America (“GAAP”). Under this method of accounting, AIU was deemed to be the accounting acquirer for financial reporting
purposes. This determination was primarily based on the facts that, immediately following the Merger: (i) AIU’s stockholders owned
a substantial majority of the voting rights in the combined company, (ii) AIU designated a majority of the members of the initial board
of directors of the combined company, and (iii) AIU’s senior management holds all key positions in the senior management of the
combined company. As a result, as of the closing date of the Merger, the net assets of the Company were recorded at their acquisition-date
relative fair values in the accompanying condensed consolidated financial statements of the Company and the reported operating results
prior to the Merger are those of AIU.
Liquidity
and Going Concern
The
Company has incurred significant cumulative consolidated operating losses and negative cash flows. As of September 30, 2021,
the Company has an accumulated deficit of $68,647,473, continued
loss from operations of $and
negative cash flows from continued operations in the amount of $10,141,745. These
factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company plans to continue
to fund its losses from operations and capital funding needs through public or private equity or debt financings or other sources,
including the continued sale of its non-core assets and sale or disposition of other assets. If the Company is not able to
secure adequate additional funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers,
liquidate assets where possible, or suspend or curtail planned programs. Any of these actions could materially harm the
Company’s business, results of operations and future prospects. The accompanying unaudited condensed consolidated financial
statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business, and do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result
should the Company not continue as a going concern. Management does not believe they have
sufficient cash for the next twelve months from the date of this report to continue as a
going concern without raising additional capital.
On
April 29, 2021, the Company executed a secured promissory note with Benworth Capital Partners, LLC in the amount of $4,550,000,
which included the grant of a first mortgage regarding the property owned by the Company and used to conduct its operations for its Naples
Memory Care facility located at 2626 Goodlette-Frank Road, Naples, Florida 34105 (the “Naples Property”). The original mortgage
on this property was paid off in the amount of $2,739,195
and closing costs of $354,357
were paid. The net proceeds to the Company in
this mortgage refinancing was $1,456,448.
This first mortgage loan has a one-year
term as compared to the prior (refinanced) mortgage which had a maturity date of 2041. This first mortgage loan provides for interest
only payments at a fixed interest rate of 9.95%.
The loan is guaranteed by certain officers.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
For
the nine months ended September 30, 2021 the Company entered into certain financing transactions related to the sale
or forward sale of approximately $1,623,500 of revenues from the MCA residential fees. These transactions resulted in net proceeds of
approximately $1,141,600. The repayment of these financing transactions range from 210 days to one year. (See “Note 6 –
Indebtedness”)
Subsequent
to September 30, 2021, the Company sold undivided interests, representing
67.36%
of the aggregate interests, in the Naples Property for an aggregate cash amount of $3,141,000
which
was received by, and is available to, Clearday. The remaining 32.64%
of the undivided interests in the Naples Property are retained by the Company.
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. The Company owns all of the voting interests of AIU Alt
Care and the sole general partner of Clearday OZ Fund, and less than 1% of the preferred economic interests in such companies.
In
November, 2019, AIU Alt Care filed a certificate of designation that authorized preferred stock designated as the Series I 10.25%
cumulative convertible preferred stock, par value
$0.01
per share (the “Alt Care Preferred Stock”).
The certificate of incorporation of AIU Alt Care authorizes 1,500,000
shares of preferred stock of which 700,000
is designated Alt Care Preferred Stock; and 1,500,000
of common stock. Each share of The Alt Care Preferred
Stock has a stated value equal to the $10.00
Alt Care Preferred Stock original issue price.
For the nine months ended September 30, 2021, $897,000
was invested in AIU Alt Care in exchange
for 89,700
shares of Alt Care Preferred Stock.
In
October, 2019, AIU Alt Care formed AIU Impact Management, LLC and Clearday OZ Fund was formed. AIU Impact Management, LLC manages
Clearday OZ Fund as its general partner, owns 1%
of Clearday OZ Fund and allocates 99%
of income gains and losses accordingly to the limited partners. For the nine months ended September 30, 2021, Clearday OZ Fund
issued 244,462
units of limited partnership units in the
amount $2,444,621.
The
exchange rate for each of the Alt Care Preferred Stock and the limited partnership units in Clearday OZ Fund are equal to (i)
the
aggregate investment amount for such security plus accrued and unpaid dividends at 10.25% per annum, (ii) divided by 80% of the
20 consecutive day volume weighted closing price of the Common Stock of Clearday preceding the conversion date. Prior to the merger,
the exchange rate was 1 share for every $10.00 of aggregate amount of the investment plus such accrued dividends
The
Company reports its non-controlling interest in subsidiaries as a separate component of equity in the unaudited condensed consolidated
balance sheets and reports both net loss attributable to the non-controlling interest and net loss attributable to the Company’s
common shareholders on the face of the unaudited condensed consolidated statement of operations.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
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 Merger Registration Statement. 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
Company’s unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer
to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”)
of the Financial Accounting Standards Board (“FASB”). The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary. All intercompany accounts and transactions have been eliminated
in consolidation.
Reclassifications.
Certain
prior period amounts have been reclassified on the accompanying condensed consolidated statements of operations and cash flows to conform
to the current period presentation. This reclassification had no effect on previously reported net income (loss),
deficit or cash flows from operating activities.
Classification of Convertible
Preferred Stock.
In 2021, the Company applied ASC 480, distinguishing liabilities from equity, and revised the consolidated financial statement presentation of its
convertible preferred stock whose redemption is outside the control of the issuer. Registrants having such securities outstanding
are required to present separately, in balance sheets, amounts applicable to the following three general classes of securities:
(i) preferred stocks subject to mandatory redemption requirements or whose redemption is outside the control of the issuer; (ii)
preferred stocks which are not redeemable or are redeemable solely at the option of the issuer; and (iii) common stocks. In addition,
the rules require disclosure of redemption terms, five-year maturity data, and changes in redeemable preferred stock.
Unaudited
Interim Financial Information.
The
unaudited condensed consolidated financial statements as of September 30, 2021, and for the three and nine months ended September 30,
2021 and 2020, 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 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, 2020 and the audited consolidated financial statements of AIU that are included in the
Merger Registration Statement.
Use
of Estimates.
The
preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities and contingencies at
the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods presented.
Management believes that these estimates and assumptions are reasonable, however, actual results may differ and could have a material
effect on future results of operations and financial position.
The
impact of the COVID-19 pandemic could continue to have a material adverse effect on the Company’s business, results of operations,
financial condition, liquidity and prospects in the near-term and beyond 2020. While management has used all currently available information
in its forecasts, the ultimate impact of the COVID-19 pandemic on its results of operations, financial condition and cash flows is highly
uncertain, and cannot currently be accurately predicted. The Company’s results of operations, financial condition and cash flows
are dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy,
such as a lengthy or severe recession or any other negative trend in the U.S. or global economy and any new information that may emerge
concerning the COVID-19 outbreak and the actions to contain it or treat its impact, which at the present time are highly uncertain and
cannot be predicted with any accuracy.
Significant estimates in our condensed consolidated
financial statements relate to revenue recognition, including contractual allowances, the allowance of doubtful accounts, self-insurance
reserves, long-lived assets, impairment of long-lived assets and estimates concerning our provisions for income taxes.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Fair
Value of Financial Instruments.
The
Company’s financial instruments are limited to cash, accounts receivable, debt and equity investments, accounts payable, operating
leases and mortgage notes payable. The fair value of these financial instruments was not materially different from their carrying values
at September 30, 2021.
Segment
Reporting.
Operating
segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation
by the chief operating decision-maker, the Chief Executive Officer, in making decisions regarding resource allocation and assessing performance.
The Company views its operations and manages its business as one operating segment.
Cash,
and Restricted Cash.
Cash,
consisting of short-term, highly liquid investments and money market funds with original maturities of three months or less at the date
of purchase, are carried at cost plus accrued interest, which approximates market.
Restricted
cash as of September 30, 2021 and December 31, 2020 includes cash that the Company deposited as security for obligations arising from
property taxes, property insurance and replacement reserve the Company is required to establish escrows as required by its mortgages
and certain resident security deposits.
Investments.
The
Company follows ASU 2016-01, “Financial Instruments—Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The
Company only has one investment in securities as of September 30, 2021 and applies the Fair Value approach to record and revalue the
share prices on a mark to market basis at each reporting interim period since the original purchase agreement. All common stock has been
marked to market to reflect the current value of the shares.
Goodwill.
Goodwill,
which has an indefinite useful life, represents the excess of purchase consideration over fair value of net assets acquired. The Company’s
goodwill as of September 30, 2021 is associated with STI’s business prior to the Merger and its other acquisition for Primrose
Wellness Group LLC by AIU prior to the merger (See Note 11 – Acquisitions). Goodwill is not subject to amortization
and is required to be tested for impairment at least on an annual basis. The Company tests goodwill for impairment as of December 31
of each year. The Company determines whether goodwill may be impaired by comparing the carrying value of the single reporting unit, including
goodwill, to the fair value of the reporting unit. If the fair value is less than the carrying amount, a more detailed analysis is performed
to determine whether goodwill is impaired. The impairment loss, if any, is measured as the excess of the carrying value of the goodwill
over the implied fair value of the goodwill and is recorded in the Company’s consolidated statements of operations.
Software
Capitalization.
With
regards to developing software, any application costs incurred during the development state, both internal expenses and those paid to
third parties are capitalized and amortized per ASC350-40. Once the software has been developed,
the costs to maintain and train others for its use will be expensed.
Risks
and Uncertainties.
The
Company’s financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash,
investments and trade receivables. At certain times throughout the year, the Company may maintain deposits in federally insured financial
institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not
exposed to significant risk on its cash balances due to the financial position of the depository institutions in which those deposits
are held. The Company performs ongoing credit evaluations of its customers, and the risk with respect to trade receivables is further
mitigated by the diversity, both by geography, of the customer base.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
On
March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).
The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social
security payments, net operating loss carry back periods, alternative minimum tax credit refunds, modifications to the net interest deduction
limitations, increased limitations on qualified charitable contributions and technical corrections to tax depreciation methods for qualified
improvement property. The Company continues to examine the impact that the CARES Act may have on its business. Currently, the Company
is unable to determine the impact that the CARES Act will have on its financial condition, results of operations, or liquidity.
The
CARES Act also 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.
Comprehensive
Income (Loss).
The
Company is required to report all components of comprehensive income (loss), including net income (loss), in the accompanying condensed
consolidated financial statements in the period in which they are recognized. Comprehensive income (loss) is defined as the change in
equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses
on investments.
Earnings Per Share.
Basic and diluted earnings per share are computed
and disclosed in accordance with FASB ASC Topic 260, Earnings Per Share. The Company utilizes the two-class method to compute earnings
available to common shareholders. Under the two-class method, earnings are adjusted by accretion amounts to redeemable noncontrolling
interests recorded at redemption value. The adjustments represent dividend distributions, in substance, to the noncontrolling interest
holder as the holders have contractual rights to receive an amount upon redemption other than the fair value of the applicable shares.
As a result, earnings are adjusted to reflect this in substance distribution that is different from other common shareholders. In addition,
the Company allocates net earnings to each class of common stock and participating security as if all of the net earnings for the period
had been distributed. The Company’s participating securities consist of share-based payment awards that contain a non-forfeitable
right to receive dividends and therefore are considered to participate in undistributed earnings with common shareholders. Basic earnings
per common share excludes dilution and is calculated by dividing net earnings allocated to common shares by the weighted-average number
of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocable to common
shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating
share-based awards.
Accounts
Receivable and Allowance for Doubtful Accounts.
The
Company records accounts receivable at their estimated net realizable value. Additionally, the Company estimates allowances for uncollectible
amounts based upon factors which include, but are not limited to, historical payment trends, write-off experience, and the age of the
receivable as well as a review of specific accounts, the terms of the agreements, the residents, the payers’ financial capacity
to pay and other factors which may include likelihood and cost of litigation.
The
allowance for doubtful accounts reflects estimates that the Company periodically reviews and revises based on new information, to which
revisions may be material. The Company’s allowance for doubtful accounts consists of the following:
Schedule
of Allowance for Doubtful Accounts
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Allowance
for Doubtful Accounts
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Balance
at Beginning of Period
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Provision
for Doubtful Accounts
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Write-offs
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Balance
at
End of Period
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December 31, 2020
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63,895
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68,911
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(63,895
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)
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68,911
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September 30, 2021
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68,911
|
|
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108,360
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(68,911
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)
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108,360
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Assets
and Liabilities Held for Sale.
The
Company designated its real estate and hotels as held for sale when it is probable these non-core business assets will be sold within
one year. The Company records these assets on the unaudited condensed consolidated balance sheets at the lesser of the carrying value
and fair value less estimated selling costs. If the carrying value is greater than the fair value less the estimated selling costs, the
Company records an impairment charge. The Company evaluates the fair value of the assets held for sale each period to determine if it
has changed (See Note 5 – Discontinued Operations).
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
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:
Schedule
of Estimated Useful Lives
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Asset Class
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Estimated
Useful Life (in years)
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Buildings
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39
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Building improvements
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39
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Equipment
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7
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Computer equipment and software
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5
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Furniture and fixtures
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7
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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. As of September 30, 2021, the
Company has recognized certain impairments, See Note 3 - Real Estate, Property and Equipment, Net.
Gain
(Loss) on Sale of Assets.
The
Company enters into real estate transactions which may include the disposal of certain commercial shopping centers and hotels, including
the associated real estate; such transactions are recorded in Note 5 – Discontinued Operations. The Company recognizes gain or
loss on these property sales when the transfer of control is complete. The Company recognizes gain or loss from the sale of equity method
investments when the transfer of control is complete, and the Company has no continuing involvement with the transferred financial assets.
Legal
Proceedings and Claims.
The
Company has been, is currently, and expects in the future to be involved in claims, lawsuits, and regulatory and other government audits,
investigations and proceedings arising in the ordinary course of the Company’s business, some of which may involve material amounts.
The Company establish accruals for specific legal proceedings when it is considered probable that
a loss has been incurred and the amount of the loss can be reasonably estimated. Also, the defense and resolution of these claims,
lawsuits, and regulatory and other government audits, investigations and proceedings may require the Company to incur significant expense.
The Company accounts for claims and litigation losses in accordance with FASB, Accounting Standards Codification™, or ASC, Topic
450, Contingencies. Under FASB ASC Topic 450, loss contingency provisions are recorded for probable and estimable losses at the
Company’s best estimate of a loss or, when a best estimate cannot be made, at the Company’s estimate of the minimum loss.
These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment,
and are refined as additional information becomes known. Accordingly, the Company is often initially unable to develop a best estimate
of loss and therefore the estimated minimum loss amount, which could be zero, is recorded; then, as information becomes known, the minimum
loss amount is updated, as appropriate. Occasionally, a minimum or best estimate amount may be increased or decreased when events result
in a changed expectation.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Lease
Accounting.
The
Company follows FASB ASC Topic 842, Leases, or ASC Topic 842, utilizing the modified retrospective transition method with no adjustments
to comparative periods presented. The Company has elected the practical expedient to account for each separate lease component of a contract
and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized.
Lessee.
The
Company regularly evaluates whether a contract meets the definition of a lease whenever a contract grants a party the right to
control the use of an identified asset for a period of time in exchange for consideration. To the extent the identified asset is able
to be shared among multiple parties, the Company has determined that one party does not have control of the identified asset and the
contract is not considered a lease. The Company accounts for contracts that do not meet the definition of a lease under other relevant
accounting guidance (such as ASC 606 for revenue from contacts with customers).
The
Company’s lease agreements primarily consist of building leases. These leases generally contain an initial term of 15 to 17 years
and may contain renewal options. If the Company’s lease agreements include renewal option periods, the Company includes such renewal
options in its calculation of the estimated lease term when it determines the options are reasonably certain to be exercised. When such
renewal options are deemed to be reasonably certain, the estimated lease term determined under ASC 842 will be greater than the non-cancelable
term of the contractual arrangement.
The
Company classifies its lessee arrangements at inception as either operating leases or financing leases. A lease is classified as a financing
lease if at least one of the following criteria is met: (1) the lease transfers ownership of the underlying asset to the lessee, (2)
the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (3) the lease
term is for a major part of the remaining economic life of the underlying asset, (4) the present value of the sum of the lease payments
equals or exceeds substantially all of the fair value of the underlying asset, or (5) the underlying asset is of such a specialized nature
that it is expected to have no alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease
if none of the five criteria described above for financing lease classification is met. The Company has no financing leases as of September
30, 2021.
ROU
assets associated with operating leases are included in “Right of Use Asset” on the Company’s unaudited condensed balance
sheet. Current and long-term portions of lease liabilities related to operating leases are included in “Lease Liabilities, Current”
and “Lease Liabilities, Long-Term” on the Company’s balance sheet as of September 30, 2021. 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.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Revenues
from the Company’s lessor arrangements are recognized on a straight-line, ratable basis over the fixed, non-cancelable term of
the relevant tenant contract, regardless of whether the payments from the tenant are received in equal monthly amounts during the life
of a tenant contract. Certain of the Company’s tenant contracts contain fixed escalation clauses (such as fixed-dollar or fixed-percentage
increases) or inflation-based escalation clauses (such as those tied to the change in CPI) and is included in discontinued operations.
If the payment terms call for fixed escalations, upfront payments, or rent-free periods, the rental revenue is recognized on a straight-line
basis over the fixed, non-cancelable term of the agreement. When calculating straight-line site rental revenues, the Company considers
all fixed elements of tenant contractual escalation provisions.
Certain
of the Company’s arrangements with tenants contain both lease and non-lease components. In such circumstances, the Company has
determined (1) the timing and pattern of transfer for the lease and non-lease component are the same and (2) the stand-alone lease component
would be classified as an operating lease. As such, the Company has aggregated certain non-lease components with lease components and
has determined that the lease components represent the predominant component of the arrangement.
Income Taxes.
The
Company’s income tax expense includes U.S. income taxes. Certain items of income and expense are not reported in tax returns and
financial statements in the same year. The Company accounts for income taxes under the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences to be included in the Company’s unaudited
condensed consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the
differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse, while the effect of a change in tax rates on deferred tax assets and liabilities is recognized
in income in the period that includes the enactment date.
The
Company can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained
upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with
a tax position is measured as the largest amount that has a greater than 50% likelihood of being realized.
Changes
in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred
tax assets will be recovered from future taxable income and, to the extent, the Company believes that the Company is more likely than
not that all or a portion of deferred tax assets will not be realized, the Company establishes a valuation allowance to reduce the deferred
tax assets to the appropriate valuation. To the extent the Company establishes a valuation allowance or increase or decrease this allowance
in a given period, the
Company
includes the related tax expense or tax benefit within the tax provision in the unaudited condensed consolidated statement of operations
in that period. In making such a determination, the Company considers all available positive and negative evidence, including future
reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent
operations. In the future, if the Company determines that it would be able to realize its deferred tax assets in excess of their net
recorded amount, the Company will make an adjustment to the deferred tax asset valuation allowance and record an income tax benefit within
the tax provision in the unaudited condensed consolidated statement of operations in that period.
The
Company pays franchise taxes in certain states in which it has operations. The Company has included franchise taxes in general and administrative
and operating expenses in its unaudited condensed consolidated statements of operations.
Revenue
Recognition.
The
Company recognizes revenue from contracts with customers in accordance with ASC Topic 606, Revenue from Contracts with Customers,
or ASC Topic 606, using the practical expedient in paragraph 606-10-10-4 that allows for the use of a portfolio approach, because
we have determined that the effect of applying the guidance to our portfolios of contracts within the scope of ASC Topic 606 on our unaudited
condensed consolidated financial statements would not differ materially from applying the guidance to each individual contract within
the respective portfolio or our performance obligations within such portfolio. The five-step model defined by ASC Topic 606 requires
the Company to: (i) identify its contracts with customers, (ii) identify its performance obligations under those contracts, (iii) determine
the transaction prices of those contracts, (iv) allocate the transaction prices to its performance obligations in those contracts and
(v) recognize revenue when each performance obligation under those contracts is satisfied. Revenue is recognized when promised goods
or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services.
A
substantial portion of the Company’s revenue at its independent living and assisted living communities relates to contracts with
residents for services that are generally under ASC Topic 606. The Company’s contracts with residents and other customers that
are within the scope of ASC Topic 606 are generally short-term in nature. The Company has determined that services performed under those
contracts are considered one performance obligation in accordance with ASC Topic 606 as such services are regarded as a series of distinct
events with the same timing and pattern of transfer to the resident or customer. Revenue is recognized for those contracts when the Company’s
performance obligation is satisfied by transferring control of the service provided to the resident or customer, which is generally when
the services are provided over time.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Resident
fees at our independent living and assisted living communities consist of regular monthly charges for basic housing and support services
and fees for additional requested services, such as assisted living services, personalized health services and ancillary services. Fees
are specified in our agreements with residents, which are generally short term (30 days to one year), with regular monthly charges billed
in advance. Funds received from residents in advance of services provided are not material to our unaudited consolidated financial statements.
Some of our senior living communities require payment of an upfront entrance fee in advance of a resident moving into the community;
substantially all of these community fees are non-refundable and are initially recorded as deferred revenue and included in accrued expenses
and other current liabilities in our unaudited condensed consolidated balance sheets. These deferred amounts are then amortized on a
straight-line basis into revenue over the term of the resident’s agreement. When the resident no longer resides within our community,
the remaining deferred non-refundable fees are recognized in revenue. Revenue recorded and deferred in connection with community fees
is not material to our unaudited condensed consolidated financial statements. Revenue for basic housing and support services and additional
requested services is recognized in accordance with ASC Topic 606 and measured based on the consideration specified in the resident agreement
and is recorded when the services are provided.
Core Business – Continuing Operations.
Resident
Care Contracts. Resident fees at the Company’s senior living communities may consist of regular monthly charges for basic housing
and support services and fees for additional requested services and ancillary services. Fees are specified in the Company’s agreements
with residents, which are generally short term (30 days to one year), with regular monthly charges billed the first of the month. Funds
received from resident in advance of services are not material to the Company’s unaudited condensed consolidated financial statements.
Below
is a table that shows the breakdown by percent of revenues related to contracts with residents versus resident fees for support or ancillary
services.
Schedule
of Revenue from Contract with Customers
|
|
|
For the three months ended September 30,
|
|
|
|
|
2021
|
|
|
%
|
|
|
2020
|
|
|
%
|
|
|
Revenue from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident rent - over time
|
|
$
|
2,731,655
|
|
|
|
96
|
%
|
|
$
|
2,487,496
|
|
|
|
94
|
%
|
|
Amenities and conveniences - point in time
|
|
|
119,922
|
|
|
|
4
|
%
|
|
|
149,330
|
|
|
|
6
|
%
|
|
Total revenue from contracts with customers
|
|
$
|
2,851,577
|
|
|
|
|
|
|
$
|
2,636,826
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30,
|
|
|
|
|
2021
|
|
|
%
|
|
|
2020
|
|
|
%
|
|
|
Revenue
from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
rent - over time
|
|
$
|
9,533,855
|
|
|
|
96
|
%
|
|
$
|
8,742,241
|
|
|
|
94
|
%
|
|
Amenities
and conveniences - point in time
|
|
|
359,765
|
|
|
|
4
|
%
|
|
|
563,772
|
|
|
|
6
|
%
|
|
Total
revenue from contracts with customers
|
|
$
|
9,893,620
|
|
|
|
|
|
|
$
|
9,306,013
|
|
|
|
|
|
The
following table presents revenue disaggregated by type of contract:
Schedule
of Disaggregated Revenue
|
|
|
For
the three Months ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
Revenue from contracts with customers:
|
|
|
|
|
|
|
|
|
|
Resident rent
|
|
$
|
2,526,864
|
|
|
$
|
2,487,496
|
|
|
Ancillary
|
|
|
256,368
|
|
|
|
66,504
|
|
|
Assisted living
|
|
|
66,845
|
|
|
|
70,076
|
|
|
Move-in
fees
|
|
|
1,500
|
|
|
|
12,750
|
|
|
Total revenue from contracts
with customers
|
|
$
|
2,851,577
|
|
|
$
|
2,636,826
|
|
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
|
|
|
For
the nine Months ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
Revenue from contracts with customers:
|
|
|
|
|
|
|
|
|
|
Resident rent
|
|
$
|
8,924,490
|
|
|
$
|
8,742,241
|
|
|
Ancillary
|
|
|
755,596
|
|
|
|
329,300
|
|
|
Assisted living
|
|
|
200,534
|
|
|
|
200,463
|
|
|
Move-in
fees
|
|
|
13,000
|
|
|
|
34,009
|
|
|
Total revenue from contracts
with customers
|
|
$
|
9,893,620
|
|
|
$
|
9,306,013
|
|
Other
Operating Income.
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law. Under the CARES Act, the U.S.
Department of Health and Human Services, or HHS, established the Provider Relief Fund. The Provider Relief Fund was further supplemented
on December 27, 2020 by the Consolidated Appropriations Act, 2021. Retention and use of the funds received under the CARES Act are subject
to certain terms and conditions, including certain reporting requirements. Other operating income includes income recognized for funds
received pursuant to the Provider Relief Fund of the CARES Act for which the Company has determined that it was in compliance with the
terms and conditions of the Provider Relief Fund of the CARES Act. The Company recognized other operating income in its condensed consolidated
statements of operations to the extent it had estimated that it had COVID-19 incurred losses or related costs for which provisions of
the CARES Act is intended to compensate. The amount of income recognized for these estimated losses and costs is limited to the amount
of funds received during the period in which the estimated losses and costs were recognized or incurred or, if funds were received subsequently,
the period in which the funds were received.
During the nine months ended September 30, 2021
the Company has received HHS Government grants amounting to $289,487 and total HHS Government grants received by the Company of $675,868.
As of September 30, 2021, the Company has recognized the funds as other income on the income statement.
(See “Note 1 - Description of Business, Basis of Presentation, Summary of Significant Accounting Policies, Liquidity and Going
Concern – HHS Government Grants”).
Discontinued
Operations.
Hotels.
During 2021 the hotel operations were suspended due to the COVID-19 and as of the date of this Report, the Company does not have
any hotel properties.
The
hotels’ results of operations consist primarily of room rentals, food and beverage sales and other ancillary goods and services
from hotel properties. Hotel operating revenues are disaggregated into room revenue, ancillary hotel revenue and other revenue on the
unaudited consolidated statements of operations. Revenues are recorded net of any discounts or sales, occupancy or similar taxes collected
from customers at the hotels, in the unaudited condensed consolidated statements of operations under discontinued operations.
Room
revenue is generated through short-term contracts with customers whereby customers agree to pay a daily rate for the right to occupy
hotel rooms for one or more nights. The Company’s performance obligations are fulfilled at the end of each night that the customers
have the right to occupy the rooms. Room revenues are recognized daily at the contracted room rate in effect for each room night.
Food
and beverage revenues are generated when customers purchase food and beverage at a hotel’s restaurant, bar or other facilities.
The Company’s performance obligations are fulfilled at the time that food and beverage is purchased and provided to the customers.
Other
revenues such as cancellation fees, telephone services or ancillary services such as laundry are recognized at the point in time or over
the time period that the associated good or service is provided.
Payment
received for a future stay is recognized as an advance deposit, which is included in Other Current Liabilities in Discontinued Operations
on the Company’s consolidated balance sheet (see Note 5 – Discontinued Operations). Advance deposits are recognized as revenue
when rooms are occupied, or goods or services have been delivered or rendered to customers. Advance deposits are generally recognized
as revenue within a one-year period.
Commercial
Shopping Centers and other Rental Properties: Leasing revenue from commercial shopping centers includes minimum rents, percentage
rents, tenant recoveries and other leasing income which are accounted for under ASC Topic 842. Minimum rental revenues are recognized
on a straight-line basis over the terms of the related leases. The difference between the amount of rent due in a year and the amount
recorded as rental income is referred to as the “straight-line rent adjustment.” Percentage rents are recognized and accrued
when tenants’ specified sales targets have been met. Estimated recoveries from certain tenants for the pro rata share of real estate
taxes, insurance and other shopping center operating expenses are recognized as revenues in the period the applicable expenses are incurred.
Other tenants pay a fixed rate, and these tenant recoveries are recognized as revenues on a straight-line basis over the term of the
related leases.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Cost
of Product Revenue.
Cost
of product revenue represents direct and indirect costs incurred to bring the product to saleable condition.
Research
and Development Expenses.
All
research and development costs are charged to expense as incurred. Research and development expenses primarily include (i) payroll and
related costs associated with research and development performed, (ii) costs related to clinical and preclinical testing of the Company’s
technologies under development, and (iii) other research and development costs including allocations of facility costs.
PPP
Loans.
The
Company recognizes Paycheck Protection Program loans (PPP loans) under the Small Business Administration as debt instruments in
accordance with ASC 470, Debt. When the loan proceeds are received, a long-term liability account (i.e., “PPP Loan Liability”)
is set up. The presentation of the loan in the balance sheet is accounted for in accordance with U.S. GAAP regarding the presentation
of assets and liabilities, whereas the portion of the loan due within 12 months from year end will be considered a current liability
and the remaining portion will be considered a long-term liability. Also, under this guidance, a borrower should not recognize
any income from the extinguishment of its debt until the borrower has been legally released as the primary obligor under the loan. In
addition, the forgiveness of PPP loans as income will be recorded as other income and not included in income from operations based on
the unprecedented nature of COVID-19.
HHS
Government Grants.
The
Company recognizes income for government grants when grant proceeds are received and the Company determines it is reasonably assured
that it will comply with the conditions of the grant, the Company will recognize the distributions received in the income statement on
a systematic and rational basis. The Company will estimate the fair value of the grant using the applicable HHS definitions of health
care related expenses and lost revenue attributable to COVID-19, considering the Company’s projected and actual results at the
end of each reporting period.
Upon conclusion that Clearday, Inc. is reasonably
assured that it has met the conditions of the grant, it must measure the amount of unreimbursed health-care related expenses and lost
revenue related to COVID-19 at the end of each reporting period and release that amount from Refundable Advance to Other Revenue. During
the nine months ended September 30, 2021 the Company has received grant amounting to $289,487
and total grant received so far by the Company amounts to $675,868.
ERTC
Funds.
The
Company is eligible to claim the employee retention tax credit (“ERTC”) for certain of our employees under the CARES
act. The refundable tax credit for 2021 is available to employers that fully or partially suspend operations during any
calendar quarter in 2021 due to orders from an appropriate governmental authority limiting commerce, travel, or group
meetings due to COVID-19, and is equal to 70% of qualified wages paid after March 12, 2020 through December 31, 2020 to
qualified employees, with a maximum credit of $7,000 per
employee. We estimate that we will be eligible to claim tax credits of approximately $1.6
million per quarter for 2021. The credit was modified and extended for wages paid from January 1, 2021 through December 31, 2021
by the Consolidated Appropriations Act, 2021. Certain of these credits are obtained by refunds of employer taxes that have
been paid and other amounts were obtained by reducing the amount of withholdings remitted to the IRS. The ERTC has recently
been terminated as of fourth quarter of 2021.
General
and Administrative Expenses.
General
and administrative expenses represent personnel costs for employees involved in general corporate functions, including finance, accounting,
legal and human resources, among others. Additional costs included in general and administrative expenses consist of professional fees
for legal (including patent costs), audit and other consulting services, travel and entertainment, charitable contributions, recruiting,
allocated facility and general information technology costs, depreciation and amortization, and other general corporate overhead expenses.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Recently
Issued Accounting Pronouncements Not Yet Adopted.
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires a financial asset,
or a group of financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This ASU
eliminates the probable initial recognition threshold and instead requires reflection of an entity’s current estimate of all expected
credit losses. In addition, this ASU amends the current available for sale security other-than-temporary impairment model for debt securities.
The length of time that the fair value of an available for sale debt security has been below the amortized cost will no longer impact
the determination of whether a credit loss exists and credit losses will now be limited to the difference between a security’s
amortized cost basis and its fair value. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326,
Financial Instruments-Credit Losses, which amends the transition and effective date for nonpublic entities and clarifies that receivables
arising from operating leases are not in the scope of this ASU. These ASUs are effective for reporting periods beginning after December
15, 2022. The Company is assessing the potential impact that the adoption of these ASUs will have on its unaudited condensed consolidated
financial statements.
In
December 2019, the FASB also issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,
which simplifies certain requirements under Topic 740, including eliminating the exception to intra-period tax allocation when there
is a loss from continuing operations and income from other sources, such as other comprehensive income or discontinued operations. The
amendments in this ASU are effective for the fiscal year beginning after December 15, 2020. The Company has determined
that this ASU does not have a material impact on its unaudited condensed consolidated financial statements.
Merger.
On
September 9, 2021, the Company completed the merger that is described in Note 1 in this Report “Description of business, Basis
of Presentation, Summary of Significant Accounting Policies, Liquidity and Going Concern - Merger between Allied Integral Untiled, Inc
and AIU Special merger Company, Inc and Name Change.” The merger was accounted for as a reverse asset acquisition pursuant to Topic
805, Clarifying the Definition of a Business, as substantially all of the fair value of the assets acquired were concentrated in
a group of similar non-financial assets, and the acquired assets did not have outputs or employees.
The
total preliminary purchase price paid in the Merger has been preliminarily allocated to the net assets acquired and liabilities
assumed based on their fair values as of the completion of the Merger. The following summarizes the preliminary allocation of the
preliminary purchase price paid in the Merger (in thousands, except share and per share amounts):
Schedule
of Net Assets Acquired and Liabilities Assumed
|
|
|
|
2021
|
|
|
Number of
shares of the combined organization owned by the Company’s pre-merger stockholders
|
|
|
1,276,042
|
|
|
Multiplied by the fair
value per share of Superconductor common stock
|
|
$
|
2.65
|
|
|
Fair value of consideration issued to effect
the Merger (preliminary)
|
|
$
|
3,381,510
|
|
|
Transaction costs
|
|
|
-
|
|
|
Purchase price
|
|
$
|
3,381,510
|
|
The
allocation of the purchase price is as follows
|
|
|
|
|
|
|
Cash acquired
|
|
$
|
259,005
|
|
|
Net assets acquired:
|
|
|
|
|
|
Prepaid expenses
|
|
|
162,434
|
|
|
Inventory
|
|
|
68,000
|
|
|
Investment in AIU real estate (eliminated in consolidation)
|
|
|
1,600,000
|
|
|
Accounts payable and accrued expenses
|
|
|
(298,353
|
)
|
|
Accrued compensation
|
|
|
(1,000,000
|
)
|
|
Debt assumed
|
|
|
(468,040
|
)
|
|
Total net assets
|
|
|
64,041
|
|
|
Fair value of excess of purchase price over net assets acquired – Preliminary Goodwill
|
|
|
3,058,464
|
|
|
Purchase price
|
|
$
|
3,381,510
|
|
The
purchase price allocation is preliminary. We continue to obtain and assess information with regard to certain estimates and assumptions.
We will record adjustments to the fair value of the assets acquired, liabilities assumed and intangible assets within the twelve
month measurement period to the extent necessary.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
|
|
3.
|
Real Estate, Property and Equipment, Net
|
Property
and equipment, net, consists of the following:
Memory
Care Facilities and Corporate
Schedule of Real Estate, Property and Equipment
|
|
|
Estimated
Useful
Lives
|
|
September
30,
2021
|
|
|
December
31,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
$
|
1,255,477
|
|
|
$
|
1,940,389
|
|
|
Building and building improvements
|
|
39 years
|
|
|
5,339,754
|
|
|
|
7,277,693
|
|
|
Furniture, fixtures,
and equipment
|
|
3-7 years
|
|
|
3,955,120
|
|
|
|
2,588,781
|
|
|
Total
|
|
|
|
|
10,550,351
|
|
|
|
11,806,863
|
|
|
Less accumulated depreciation
|
|
|
|
|
(3,328,850
|
)
|
|
|
(2,953,579
|
)
|
|
Real estate, property
and equipment, net
|
|
|
|
$
|
7,221,501
|
|
|
$
|
8,853,284
|
|
Non-core
businesses classified as assets held for sale:
|
|
|
Estimated
Useful
Lives
|
|
September
30, 2021
|
|
|
December
31, 2020
|
|
|
Land
|
|
|
|
$
|
3,070,537
|
|
|
$
|
4,288,915
|
|
|
Building and building improvements
|
|
39 years
|
|
|
3,648,016
|
|
|
|
5,898,419
|
|
|
Furniture, fixtures and equipment
|
|
5-7 years
|
|
|
1,692,672
|
|
|
|
2,099,568
|
|
|
Other
|
|
3-5 years
|
|
|
75,940
|
|
|
|
200,969
|
|
|
Total
|
|
|
|
|
8,487,165
|
|
|
|
12,487,871
|
|
|
Less accumulated depreciation
|
|
|
|
|
(2,313,268
|
)
|
|
|
(4,175,035
|
)
|
|
Real estate, property
and equipment, net
|
|
|
|
$
|
6,173,897
|
|
|
$
|
8,312,836
|
|
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 $433,198 and $461,337 for the nine months ended September 30, 2021 and 2020, respectively and $129,074
and $149,541 for the three months ended September 30, 2021 and 2020, respectively.
The
Company has reviewed the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. If there is an indication that the value of an asset is not recoverable, the
Company determines the amount of impairment loss, if any, by comparing the historical carrying value of the asset to its estimated fair
value. The Company determined estimated fair value based on input from market participants, the Company’s experience selling similar
assets, market conditions and internally developed cash flow models that the Company’s assets or asset groups are expected to generate,
and the Company considers these estimates to be a Level 3 fair value measurement.
In
the third quarter of 2021, the Company recognized an impairment charge of $2,745,427 related to its Naples facility,
and an impairment charge of $1,423,328 and $227,473 with respect to the ROU assets related to its New Braunfels facility and its
Simpsonville facility, respectively, resulting in a total impairment expense of $4,396,228 for the nine months ended
September 30, 2021. See Note 4 - Leases for additional information on the ROU assets.
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. The
Company transferred the SeaWorld property to the lender in the first Quarter of 2021 and in the fourth quarter of 2021,
sold the Buda hotel. The SeaWorld hotel was impaired in the amount of $986,000 in
the third Quarter of 2020 and $600,000 in
the fourth Quarter of 2020. Additionally, the Buda hotel was impaired in the amount of $811,061 in
the fourth Quarter of 2020.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
On March 10, 2021,
the Company executed a side agreement with the lender of the SeaWorld Hotel Note (“SeaWorld Settlement Agreement”)
that provided for the transfer of the hotel property to the lender and the limitation of the obligations to
the Company and the guarantors. See Note 5 – Discontinued Operations.
On
May 24, 2021, the Company entered into an agreement to sell its Buda Hotel in the amount of $4,350,000.
This property was sold on October 1, 2021 under the terms of this agreement, as described in Note 5 – Discontinued Operations.
Considering the above offer for sale and guidance available as per ASC 360, management considered the offer price less cost of
transfer as fair market value of group assets of Buda Hotel and reversed the impairment provision of $811,061
on June 30, 2021.
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 leased three memory care facilities from MHI-MC San Antonio, LP, MHI-MC Little Rock, LP, and MHI-MC New Braunfels, LP (collectively
“MHI entities”) under three separate lease agreements and originally recorded a right of use asset and a lease liability
of $35,782,153. The Amended Leases contain three options to renew, which were not considered reasonably certain of being exercised as
of the lease commencement date nor the balance sheet date.
As
of September 30, 2021, the Company leased one memory care facility from MC-Simpsonville, SC-1-UT, LLC (the “Simpsonville Landlord”)
under a 15-year non-cancelable lease agreement. Provided the Company is not in default, the lease agreement has three successive five-year
renewal options and has the right of first refusal to acquire the Simpsonville Landlord’s interest in the property in certain situations.
Beginning January 2019, the Company ceased paying the Simpsonville Landlord rent. The Landlord filed a lawsuit against the guarantors
of the lease and on October 21, 2020, the trial court issued a final judgment of the damages for the plaintiff in the amount of $2,801,365.
The trial court has not made findings of fact related to the Company’s liability under the Lease. Additionally, the Company has
appealed the trial court judgement as they believe it has reasonable likelihood of success to reduce certain fees in the amount of $190,043
in past taxes and $248,074 in attorney’ fees. the Company has accrued an amount that it determines is reasonable with respect to
this contingency. See Note 7 – Commitments and Contingencies for additional information.
All
leases are classified as operating leases. The Company does not have any leases within its non-core business. Therefore, no right-of-use
assets or lease liabilities were recorded within non-current assets held for sale or lease liability on the unaudited condensed consolidated
balance sheet following the adoption of ASC 842. Weighted-average remaining lease terms and discount rate as of September 30, 2021, are
13.5 years and 8.25%, respectively.
Per ASC 360-10-35-21, the Company performed an
impairment test on the ROU assets and the New Braunfels and Simpsonville facilities failed the recoverability test as set out in
the accounting standard. As a result, the New Braunfels and Simpsonville facilities incurred an impairment charge in the amount of $1,423,328
and $227,473, respectively in the third Quarter 2021.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Lease
Costs.
For
the three and nine months ended September 2021 and September 30, 2021, the lease costs recorded in the unaudited
condensed consolidated statement of operations are as follows:
Summary
of Lease Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Lease costs:
|
|
|
|
|
|
|
|
|
|
Operating lease costs
|
|
$
|
3,730,560
|
|
|
$
|
3,446,277
|
|
|
Short-term lease costs
|
|
|
33,752
|
|
|
|
77,335
|
|
|
Total lease costs
|
|
$
|
3,764,312
|
|
|
$
|
3,523,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Lease costs:
|
|
|
|
|
|
|
|
|
|
Operating lease costs
|
|
$
|
1,243,520
|
|
|
$
|
917,336
|
|
|
Short-term lease costs
|
|
|
7,830
|
|
|
|
24,843
|
|
|
Total lease costs
|
|
$
|
1,251,350
|
|
|
$
|
942,179
|
|
Operating
Lease Payments.
The
following table summarizes the maturity of the Company’s operating lease liabilities as of September 30, 2021:
Summary
of Operating Lease Liabilities
|
Year Ending
September
|
|
Operating
Leases
|
|
|
2021 (Remaining of 2021)
|
|
$
|
990,358
|
|
|
2022
|
|
|
4,026,961
|
|
|
2023
|
|
|
4,121,550
|
|
|
2024
|
|
|
4,218,384
|
|
|
2025
|
|
|
4,310,799
|
|
|
2026
|
|
|
4,439,167
|
|
|
2027
|
|
|
4,537,167
|
|
|
Thereafter
|
|
|
39,945,641
|
|
|
Total minimum lease payments
|
|
$
|
66,590,027
|
|
|
Less: amounts representing
interest
|
|
|
28,776,778
|
|
|
Present value of future minimum lease payments
|
|
|
37,823,249
|
|
|
Less current portion
|
|
|
911,745
|
|
|
Non-current lease liabilities
|
|
$
|
36,911,504
|
|
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
|
|
5.
|
Discontinued Operations
|
The Company held two hotel properties during 2021,
each of which were classified as non-core assets and had experienced an extended closure since March 2020 due to the COVID-19 pandemic,
resulting in significant reductions in cash flows and ability to repay the separate mortgage loans on these properties.
SeaWorld Hotel.
During the nine months ended September 30, 2021,
the Company entered into an agreement with Pender Capital Asset Based Lending Fund I, L.P. regarding the SeaWorld hotel property
and transferred the property to this lender. This lender agreed to limit the aggregate obligations under the secured obligations to the
amount of the deficiency realized by the lender on the subsequent sale of the SeaWorld hotel property, subject to an aggregate specified
limit assuming that the Company complied with the terms of the agreement. In May, 2021, the lender sold the SeaWorld hotel
property which created an aggregate deficiency of $216,000 plus the required payment of taxes in the amount of $82,500 which
the Company has accrued as of September 30, 2021. Furthermore, the Company is liable to pay the property taxes for 2021,
which amount would be due by January 31, 2022 and is approximately $20,000.
Buda
Hotel.
As
of May 24, 2021, the Company has entered into an agreement for the sale of the Buda hotel property amounting to $4,350,000.
The sale closed on October 1, 2021 as described in Note 15 – Subsequent Events.
The
Company previously recognized an impairment provision amounting to $811,061 for this
property in accordance with ASC360 and ASC820. Considering the sale offer and guidance available as per ASC 360, the
Company considered the offer price less cost of transfer as fair market value of the Buda hotel property and reversed
the impairment provision of $811,061
on June 30, 2021. The impairment amount was included in the other income portion of the Unaudited condensed statement of operations—discontinued
operations and was also included in the income from discontinued operations line item in the unaudited condensed consolidated statement
of operations.
The
sale of the Buda hotel property completes the sale of all of the Company’s hotel properties and relieves approximately $4,500,000
of financing liabilities and approximately $4,100,000
of long-term assets, net of accumulated
depreciation, from the Company’s unaudited condensed consolidated balance sheet resulting in a gain of $177,851.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
During
the nine months ended September 30, 2020, the Company sold three non-core assets: A hotel property, commercial real estate property and
the remaining portion of a previously sold commercial real estate property. The commercial real estate property and the hotel property,
which were owned separately by two of the Company’s subsidiaries in San Antonio, Texas, were sold, with proceeds of $13,300,000
and $2,500,000, respectively. Additionally, the remaining portion of a commercial real estate property located in San Antonio, Texas,
was also sold, with proceeds of $700,000. See Note 6 - Indebtedness for more information regarding these and other transactions.
Summary
of Non-core Assets
|
|
|
Commercial
Property #1
|
|
|
Hotel
Property
|
|
|
Parcel
- Commercial Property #2
|
|
|
Total
2020
|
|
|
Contract sales price
|
|
$
|
13,300,000
|
|
|
$
|
2,500,000
|
|
|
$
|
700,000
|
|
|
$
|
16,500,000
|
|
|
Fees
|
|
|
(1,461,312
|
)
|
|
|
(134,043
|
)
|
|
|
-
|
|
|
|
(1,595,355
|
)
|
|
Seller buildout obligation
|
|
|
(856,085
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(856,085
|
)
|
|
Net book value of assets
|
|
|
6,425,983
|
|
|
|
1,981,889
|
|
|
|
622,466
|
|
|
|
9,030,338
|
|
|
Gain/(loss) on sale
of assets
|
|
$
|
4,556,620
|
|
|
$
|
384,068
|
|
|
$
|
77,534
|
|
|
$
|
5,018,222
|
|
The
following statements are the unaudited condensed consolidated balance sheets and income statements for the Company’s discontinued
operations:
Schedule of Discontinued
Operations for Consolidated Balance Sheets and Income Statements
|
|
|
September
30, 2021
|
|
|
December
31, 2020
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
72,993
|
|
|
$
|
343,044
|
|
|
Restricted cash
|
|
|
-
|
|
|
|
8,201
|
|
|
Accounts receivable
|
|
|
100
|
|
|
|
18,421
|
|
|
Prepaid expenses
|
|
|
77,205
|
|
|
|
23,641
|
|
|
Total current assets
|
|
|
150,298
|
|
|
|
393,307
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in non-consolidated entities
|
|
|
-
|
|
|
|
77,056
|
|
|
Note Receivables
|
|
|
6,323
|
|
|
|
6,323
|
|
|
Real estate, property
and equipment, net
|
|
|
6,173,897
|
|
|
|
8,312,836
|
|
|
Total long-term assets
held for sale
|
|
|
6,330,518
|
|
|
|
8,396,215
|
|
|
TOTAL ASSETS
|
|
$
|
6,330,518
|
|
|
$
|
8,789,522
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
699
|
|
|
$
|
66,650
|
|
|
Accrued expenses
|
|
|
1,168,627
|
|
|
|
1,031,584
|
|
|
Accrued interest
|
|
|
133,170
|
|
|
|
133,170
|
|
|
Current portion of long-term
debt
|
|
|
1,858,223
|
|
|
|
4,107,599
|
|
|
Total current liabilities
|
|
|
3,160,719
|
|
|
|
5,339,003
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
Note payable
|
|
|
530,596
|
|
|
|
784,945
|
|
|
Long-term debt, less
current portion
|
|
|
4,897,241
|
|
|
|
5,121,760
|
|
|
Total long-term liabilities
held for sale
|
|
|
5,427,837
|
|
|
|
5,906,705
|
|
|
TOTAL LIABILITIES
|
|
$
|
8,488,556
|
|
|
$
|
11,245,708
|
|
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel
room and other revenue
|
|
$
|
-
|
|
|
$
|
2,120
|
|
|
$
|
-
|
|
|
$
|
352,207
|
|
|
Commercial
property rental revenue
|
|
|
21,493
|
|
|
|
20,867
|
|
|
|
63,853
|
|
|
|
236,688
|
|
|
Total
revenues, net
|
|
|
21,493
|
|
|
|
22,987
|
|
|
|
63,853
|
|
|
|
588,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
20,935
|
|
|
|
22,720
|
|
|
|
93,689
|
|
|
|
477,954
|
|
|
General
and administrative expenses
|
|
|
422,421
|
|
|
|
467,522
|
|
|
|
751,105
|
|
|
|
1,390,212
|
|
|
Total
operating expenses
|
|
|
443,356
|
|
|
|
490,242
|
|
|
|
844,794
|
|
|
|
1,868,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(421,864
|
)
|
|
|
(467,255
|
)
|
|
|
(780,941
|
)
|
|
|
(1,279,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other/(income)
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
27,411
|
|
|
|
182,115
|
|
|
|
190,010
|
|
|
|
592,876
|
|
|
Gain
on disposal of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,634,154
|
)
|
|
Equity
income from investees, net of applicable taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
15,000
|
|
|
|
(787,044
|
)
|
|
Impairment
expense (recovery)
|
|
|
-
|
|
|
|
-
|
|
|
|
(811,061
|
)
|
|
|
-
|
|
|
Other
(income) expenses
|
|
|
52,558
|
|
|
|
250,514
|
|
|
|
(305,301
|
)
|
|
|
451,872
|
|
|
Total
(income)/expense
|
|
|
(79,969
|
)
|
|
|
432,629
|
|
|
|
(911,352
|
)
|
|
|
(4,376,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(501,833
|
)
|
|
$
|
(899,884
|
)
|
|
$
|
130,411
|
|
|
$
|
3,097,179
|
|
As
of September 30, 2021, and December 31, 2020, the current portion of long-term debt within the Company’s unaudited condensed financial
statements for our core MCA and Corporate facilities is $10,210,849
and $1,623,375
respectively. As of September 30, 2021, and
December 31, 2020, the debt associated with our current portion of long-term debt within the Company’s unaudited condensed consolidated
financial statements for our assets held for sale as is $1,758,223
and $4,107,599,
respectively. This debt is expected to be repaid primarily with the proceeds from the sales of these assets. See Note
2 – Summary of Significant Accounting Policies for more information about the Company’s assets held for sale.
Interest
and Future Maturities.
The
Company has recorded interest expense in the accompanying unaudited condensed consolidated financial statements of $304,350 and $378,146
for the nine months ended September 30, 2021, and 2020, respectively, and $190,010 and $592,876 for discontinued operations for the same
periods.
The
Company has recorded interest expense in the accompanying unaudited condensed consolidated financial statements of $30,951 and
$95,466 for
the three months ended September 30, 2021, and 2020, respectively, and $27,411and
$182,115 for
discontinued operations for the same periods. The change in the interest expense reflects primarily the impact of the repayment
of debt since the beginning of the prior year period and during this period, offset in part by incurrence of indebtedness at the
latter part of this period at higher and lower interest rates.
Schedule
of Long Term Debt
|
As of September
30, 2021
|
|
Continuing
Core
|
|
|
Discontinued
Non-Core
|
|
|
Total
|
|
|
Long-term
Debt
|
|
As of September
30,
|
|
Continuing
Core
|
|
|
Discontinued
Non-Core
|
|
|
Total
|
|
|
2021 (Reminder of 2021)
|
|
$
|
407,462
|
|
|
$
|
1,758,223
|
|
|
$
|
2,165,685
|
|
|
2022
|
|
|
10,392,732
|
|
|
|
284,366
|
|
|
|
10,677,098
|
|
|
2023
|
|
|
360,000
|
|
|
|
499,185
|
|
|
|
859,185
|
|
|
2024
|
|
|
360,000
|
|
|
|
214,760
|
|
|
|
574,760
|
|
|
2025
|
|
|
360,000
|
|
|
|
231,519
|
|
|
|
591,519
|
|
|
Thereafter
|
|
|
2,245,804
|
|
|
|
4,275,250
|
|
|
|
6,521,054
|
|
|
Total
obligations
|
|
$
|
14,125,998
|
|
|
$
|
7,263,303
|
|
|
$
|
21,389,301
|
|
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
The
following table summarizes the maturity of the Company’s long-term debt and notes payable as of September 30, 2021:
Summary
of Long Term Debt and Notes Payables
|
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
September
30,
2021
|
|
|
December
31,
2020
|
|
|
Memory Care (Core) Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Naples Mortgage
|
|
December 2041
|
|
|
3.99
|
%
|
|
$
|
-
|
|
|
$
|
2,731,100
|
|
|
Naples Equity Loan
|
|
May 2022
|
|
|
9.95
|
%
|
|
|
4,550,000
|
|
|
|
-
|
|
|
Libertas Financing Agreement
|
|
May 2022
|
|
|
33.00
|
%
|
|
|
488,408
|
|
|
|
-
|
|
|
New Braunfels Samson Funding 1
|
|
April 2022
|
|
|
25.00
|
%
|
|
|
142,000
|
|
|
|
-
|
|
|
New Braunfels Samson Group 2
|
|
April 2022
|
|
|
39.00
|
%
|
|
|
142,000
|
|
|
|
-
|
|
|
Naples Operating Samson Funding
|
|
April 2022
|
|
|
31.00
|
%
|
|
|
150,000
|
|
|
|
-
|
|
|
Naples LLC CFG Merchant Solutions
|
|
September 2022
|
|
|
15.00
|
%
|
|
|
275,000
|
|
|
|
|
|
|
Clearday Operating PPP Loans
|
|
January 2022
|
|
|
1.00
|
%
|
|
|
468,040
|
|
|
|
-
|
|
|
AGP
|
|
July
2022
|
|
|
2.00
|
%
|
|
|
2,630,000
|
|
|
|
-
|
|
|
MCA Invesque Loan(1)
|
|
January 2022
|
|
|
8.50
|
%
|
|
|
178,852
|
|
|
|
1,610,577
|
|
|
New Braunfels Business Loan
|
|
June 2022
|
|
|
6.25
|
%
|
|
|
105,463
|
|
|
|
185,359
|
|
|
Gearhart Loan(2)
|
|
December 2021
|
|
|
7.00
|
%
|
|
|
238,578
|
|
|
|
238,578
|
|
|
Five C’s Loan
|
|
December 2021
|
|
|
9.85
|
%
|
|
|
325,000
|
|
|
|
|
|
SBA PPP Loans
|
|
February 2022
|
|
|
1.00
|
%
|
|
|
2,525,108
|
|
|
|
1,364,962
|
|
|
Equity Secure Fund I,
LLC
|
|
June 2022
|
|
|
15.00
|
%
|
|
|
1,000,000
|
|
|
|
-
|
|
|
Notional amount of debt
|
|
|
|
|
|
|
|
|
13,218,449
|
|
|
|
6,455,576
|
|
|
Less: current maturities
|
|
|
|
|
|
|
|
|
10,453,977
|
|
|
|
1,623,375
|
|
|
Unamortized Discount
|
|
|
|
|
|
|
|
|
148,254
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
2,616,218
|
|
|
$
|
4,832,201
|
|
|
Non-core businesses classified
as liabilities held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seaworld Hotel Note (3)
|
|
January
2021
|
|
|
Variable
|
|
|
$
|
299,000
|
|
|
$
|
3,395,000
|
|
|
Buda Hotel Note (4)
|
|
January
2037
|
|
|
Variable
|
|
|
|
4,013,425
|
|
|
|
4,046,771
|
|
|
SBA PPP Loan
|
|
May
2022
|
|
|
1.00
|
%
|
|
|
604,800
|
|
|
|
255,300
|
|
|
Buda
Tax Loans (5)
|
|
June
2028
|
|
|
8.99
|
%
|
|
|
466,713
|
|
|
|
271,365
|
|
|
2K Hospitality Secured Note
|
|
October 2022
|
|
|
None
|
|
|
|
120,000
|
|
|
|
-
|
|
|
Notional amount of debt
|
|
|
|
|
|
|
|
|
5,503,938
|
|
|
|
7,968,436
|
|
|
Less: current maturities
|
|
|
|
|
|
|
|
|
1,045,624
|
|
|
|
3,395,000
|
|
|
|
|
|
|
|
|
|
|
$
|
4,358,314
|
|
|
$
|
4,573,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Artesia Note (6)
|
|
June
2033
|
|
|
Variable
|
|
|
$
|
228,769
|
|
|
$
|
238,168
|
|
|
Tamir Note
|
|
March
2022
|
|
|
12.00
|
%
|
|
|
300,000
|
|
|
|
300,000
|
|
|
Leander Note
|
|
April
2022
|
|
|
12.75
|
%
|
|
|
700,000
|
|
|
|
700,000
|
|
|
Notional amount of debt
|
|
|
|
|
|
|
|
|
1,228,769
|
|
|
|
1,238,168
|
|
|
Less: current maturities
|
|
|
|
|
|
|
|
|
712,599
|
|
|
|
712,599
|
|
|
|
|
|
|
|
|
|
|
$
|
516,170
|
|
|
$
|
525,569
|
|
As
of September 30, 2021, the current portion of long-term debt on the accompanying unaudited condensed consolidated balance sheet for
core business operations includes $148,254
of unamortized debt discounts. As of September
30, 2021, the long-term debt on the accompanying unaudited condensed consolidated balance sheet for non-core business operations
includes $21,528
of unamortized debt discount.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Notes:
|
(1)
|
Note is issued by MCA and is secured
by all of MCA’s assets which consist primarily of its ownership of its residential facilities.
|
|
(2)
|
Note
is issued by MCA and is secured by a senior subordinated lien on all of MCA’s assets which consist primarily of its ownership
of its residential facilities. This stated maturity of this note has been extended to December 15, 2021. Clearday is
negotiating the terms of an additional extension or forbearance with this lender. However, there can be no assurance that any
such agreement will be on terms that are acceptable to Clearday, or at all.
|
|
(3)
|
Obligations have been compromised
under the terms of a settlement agreement as of March 10, 2021 to approximately $318,500,
as described above.
|
|
(4)
|
This note is a senior secured with
an interest rate equal to greater of 10.5%
or 30-day LIBOR plus 8.175%.
This note was repaid in full in connection with sale of the mortgaged property as described in Note 15 - Subsequent Events.
|
|
(5)
|
Interest rate is 8.99%,
per annum and is secured by the Buda Hotel property. This note was repaid in full in connection with sale of the mortgaged property as
described in Note 15 - Subsequent Events.
|
|
(6)
|
This obligation is secured by a first
mortgage on the real property and is personally guaranteed by certain individuals.
|
|
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
September
30, 2021
|
|
|
December
31, 2020
|
|
|
Core Businesses (Continuing
Operations) Notes Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cibolo Creek Partners promissory
note
|
|
December 2025
|
|
|
0.09
|
%
|
|
$
|
111,206
|
|
|
$
|
-
|
|
|
Primrose - Miscellaneous
|
|
July
2029
|
|
|
7.00
|
%
|
|
|
13,320
|
|
|
|
-
|
|
|
Round Rock Development
Partners Note
|
|
December 2025
|
|
|
0.09
|
%
|
|
|
500,000
|
|
|
|
500,000
|
|
|
Notional amount of debt
|
|
|
|
|
|
|
|
|
624,526
|
|
|
|
500,000
|
|
|
Guarantee Fees
|
|
|
|
|
|
|
|
|
283,023
|
|
|
|
139,883
|
|
|
|
|
|
|
|
|
|
|
$
|
907,549
|
|
|
$
|
639,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Core
Businesses (Discontinued Continuing Operations) Notes Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cibolo Creek Partners
promissory note
|
|
December 2025
|
|
|
0.09
|
%
|
|
$
|
530,596
|
|
|
$
|
641,804
|
|
|
Notional amount of debt
|
|
|
|
|
|
|
|
|
530,596
|
|
|
|
641,804
|
|
|
Guarantee Fees
|
|
|
|
|
|
|
|
|
-
|
|
|
|
143,141
|
|
|
|
|
|
|
|
|
|
|
$
|
530,596
|
|
|
$
|
784,945
|
|
In addition, the Company has an obligation for
the payment of the acquisition of the Primrose adult daycare center of $200,000, of which 50% is subject to payment on November 30, 2021
and 50% is subject to payment on May 31, 2022.
Memory
Care (Core) Facilities:
Naples
Mortgage.
In
connection with the Company’s purchase of its memory care facility in Naples, Florida in 2013, it assumed the underlying mortgage
with Housing & Healthcare Finance, LLC, dated November 23, 2011. This mortgage is a financing administered by the U.S. Department
of Housing and Urban Development or HUD. The original mortgage totaled $3.4 million. The mortgage was collateralized by a security interest
in the Naples property and other assets within the Naples property. The mortgage reduced the prepayment penalties through December 31,
2021. The prepayment penalty is 2% during 2020 and 1% during 2021. The mortgage had an interest rate of 3.99%.
Naples Equity Loan.
On
April 29, 2021, the Company executed a secured promissory note with Benworth Capital Partners, LLC in the amount of $4,550,000.
The original Naples mortgage was paid off in the amount of $2,739,195
and there were closing costs of $354,357
which netted the Company proceeds in the amount
of $1,456,448.
This secured promissory note is a one-year loan with interest only payments at a fixed interest rate of 9.95%.
This loan is guaranteed by certain officers of the Company and is secured by the Memory Care facility located
at 2626 Goodlette-Frank Road, Naples, Florida 34105.
Libertas
Financing Agreement.
On
May 25, 2021, the Company executed a merchant cash advance loan with Libertas Funding LLC in the amount of $737,000 with a purchase price
consideration of $550,000 less $11,000 in origination fees for net proceeds of $539,000. The debt discount on the loan is $176,000 and
will be amortized over the life of the loan. The weekly payment amount under the agreement is $14,623 and interest rate associated with
this agreement is 1.29% per week. Additionally, the Company can terminate the transaction at any time by repurchasing future receipts
sold to purchaser but not delivered. This agreement has no stated maturity date. However, based on historical revenue, management has
estimated that repayment will 12 months. The obligations under this agreement are guaranteed by James Walesa, the Chairman and CEO of
the Company.
New
Braunfels Samson Funding 1.
The
Company entered into a Futures Receipts Sale and Purchase Agreement dated as of September 28, 2021 (“Factoring Agreement 1”),
with Cloudfund LLC d/b/a Samson Group (“NB Financier 1”). Under Factoring Agreement 1, a specified percentage of its future
receipts (as defined by Factoring Agreement 1, which include the future resident revenues in the New Braunfels residential care facility
owned by MCA) were sold to NB Financier 1, which were equal to $142,000 for a purchase price of $100,000, less origination and other
fees of $6,000. The obligations under Factoring Agreement 1 are repaid in 10 equal weekly installments. Factoring Agreement 1 expressly
provides that the sale of the future receipts shall be construed and treated for all purposes as a true and complete sale and includes
customary provisions granting a security interest under the Uniform Commercial Code in accounts and the proceeds. The obligations under
Factoring Agreement 1 are guaranteed by James Walesa, the Company’s Chairman and Chief Executive Officer.
The
Company entered into a Revenue Purchase Agreement and Security Agreement and Guaranty of Performance dated as of September 28, 2021 (“Factoring
Agreement 2”) Samson MCA LLC (“NB Financier 2”). Under Factoring Agreement 2, a specified percentage of its future
receipts (as defined by Factoring Agreement 2, which include the payments to MCA as a result of its sale of goods and/or services such
as its future resident revenues in the New Braunfels residential care facility owned by MCA), which were equal to $142,000 for a purchase
price of $100,000, less origination and other fees of $5,125. Factoring Agreement 2 expressly provides that the sale of the future receipts
shall be construed and treated for all purposes as a true and complete sale and includes customary provisions granting a security interest
under the Uniform Commercial Code in accounts and the proceeds. The obligations under Factoring Agreement 2 are guaranteed by James Walesa,
the Company’s Chairman and Chief Executive Officer.
PPP
Loans.
In
May 2020, the Company was granted four separate loans under the Paycheck Protection Program (the “PPP Loans”) administered
by the United States Small Business Administration (“SBA”) established under the Coronavirus Aid, Relief, and Economic Security
(“CARES”) Act, which has enabled the Company to retain the Company’s employees during the period of disruption created
by the Coronavirus pandemic. 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. In the first nine months of September 2021, the Company has received an
additional $1,836,014 in PPP loans.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
AGP Loan.
The Company entered into an unsecured promissory
note with A.G.P./Alliance Global Partners (“AGP”) which was the financial adviser to AIU in connection with the merger. The
$2,630,000 principal amount of this note represents the unpaid fee amount then owed to AGP for its services. Interest under this note
accrues at 2% per annum. The Company makes monthly payments of $30,000 and will pay 50% of net proceeds (which shall be deemed gross
proceeds minus direct selling costs, expenses and commissions) received, directly or indirectly, by the Company and/or its subsidiaries
from the issuance of any equity or equity-linked financing (including convertible debt), less any selling commissions. Accrued and unpaid
obligations of this note are due on September 10, 2022.
MCA Invesque Loan.
On
November 6, 2017, the Company executed a promissory note for $600,000 with Mainstreet Health Financing, LP. The loan had no prepayment
penalties. In January 2018, a principal payment of $300,000 was made on this loan. In November 2018, this loan agreement was amended
for the then-current principal balance of $300,000. Effective July 31, 2019, the Company signed an amended and restated promissory note
with the landlord parties, as defined for the principal sum of $3.3 million (the “A&R MCA Note”), including the previously
outstanding principal balance of $300,000. Proceeds from the loan were used to pay outstanding obligations to certain landlords of three
leased memory care facilities related to a settlement agreement between the parties. See Note 7 – Commitments and Contingencies.
In
accordance with the A&R MCA Note, three principal payments totaling $1.5
million were made during 2019. Beginning January
2020, the Company is required to make monthly principal and interest payments of $47,812.
The loan has a fixed interest rate of 8.5%.The
note is guaranteed by certain officers and directors of the Company and is collateralized by a pledge of proceeds from the sale of the
Naples facility and another specified property interest (in Westover Town Center) that was sold in 2021.
In
April 2021, there were three properties in which the Company had an interest and whose proceeds from any sale were pledged to the lender
in collateral to the guarantees. One of those interests, Westover Town Center, was sold and the proceeds in the amount of $1,128,126
was used to pay down $1,000,000
against the Invesque loan balance in September
2021.
New
Braunfels Business Loan.
On
December 23, 2015, the Company executed a business loan agreement with ServisFirst Bank for $600,000. In October 2019, the loan was extended
and now matures in March 2022. The loan has a fixed interest rate of 6.25%. The note is guaranteed by certain officers and directors
of the Company and is collateralized by furniture, fixtures and equipment at MCA New Braunfels.
Gearhart
Loan.
On
April 1, 2012, the Company executed a promissory note with Betty Gearhart for $200,000
(the “Gearhart Note”). Interest accrues
at a fixed rate of 7.0%
and is payable quarterly in January, April, July and October. In April 2015, the Company executed the First Amended and Restated Promissory
Note in the principal amount of $238,578,
which extended the maturity date until April 2017. The note is collateralized by the debtor granting a security interest to Betty Gearhart
including all assets of MCA, LLC as well as any proceeds (including insurance proceeds) of any and all of the foregoing collateral. The
maturity date of the loan was further extended in April 2017, April 2018 and April 2020. The Second Amendment to the Amended and Restated
Promissory Note (the “Second Amendment”) was executed on March 5, 2020 in the principal amount of $218,578
and has a maturity date of April 1, 2021. The
scheduled maturity date of this note has been further extended to December 15, 2021. Clearday is negotiating the terms of an additional
extension or forbearance with this lender. However, there can be no assurance that any such agreement will be on terms that are acceptable
to Clearday, or at all.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Five
C’s, LLC Loan.
As
of April 1, 2019, the Five C’s LLC entered into an
agreement issuing capital stock that reduced obligations under an existing promissory note to $325,000 that
was payable one year after the initial loan was funded, with a right of AIU to extend the maturity date for an
additional six-month period. As of December 31, 2020, this note was in default. Subsequently, in February 2021, an
extension agreement was entered which set an interest rate of 9.85%
per annum and rescheduled the maturity date to December
31, 2021. This note can be extended by the
parties for successive six-month periods unless the noteholder provides a notice to the borrower that the term shall not be extended
on or prior to the date that is 30 days prior than the expiration of the note.
Equity Secure Fund I, LLC.
On
March 26, 2021, the Company executed a promissory note for $1,000,000 with Equity Secured Fund I, LLC. The loan matures on April 26,
2022 and was subject to one (1) twelve (12)-month extension option. The interest rate of the loan is 11.50% and is guaranteed by certain
officers and is collateralized the building located at 8800 Village Drive in San Antonio, Texas. Total proceeds received by the Company
was $803,963 after adjusting the interest for the period amounting to approximately $115,000, which is classified as prepaid interest
in the unaudited condensed unaudited condensed consolidated balance sheet; $44,891 and $5,575 that was paid for prepaid property tax
and prepaid insurance respectively (both of which) are included in “net deferred finance cost” and $31,000 in closing costs.
Debt
Related to Assets Held for Sale
SeaWorld
Hotel Note.
On
July 12, 2019, the Company executed a loan agreement with Pender West Credit 1 REIT, LLC for a principal amount of $3,395,000 (“SeaWorld
Hotel Note”) to refinance existing financing for the hotel. The note had an initial maturity date of August 1, 2020 and is collateralized
by a security interest in the property and other assets within the property. The note required interest only monthly payments with the
full principal balance becoming due upon the maturity date. The note has a variable interest rate equal to the greater
of 10.5% or LIBOR plus 8.175%. The Company incurred $308,829 in financing costs related to this loan which were expensed in 2019 due
to the short-term nature of the loan.
Effective
March 11, 2021, the Company entered into an agreement
with the lender to transfer the property to the lender. This lender agreed to limit the aggregate obligations
under the secured obligations to the amount of the deficiency realized by the lender on the subsequent sale of the SeaWorld hotel
property, subject to an aggregate specified limit assuming that the Company complied with the terms of the agreement. In May 2021,
the mortgage lender sold the SeaWorld Property and determined the deficiency of the mortgage loan, subject to a $300,000 maximum
amount that was specified in the Settlement Agreement, to be equal to $216,000
plus the required payment of taxes in the amount
of $82,500
which the Company has accrued as of June
30, 2021. Additionally, the Company is required to pay their pro rata share of the property taxes for 2021,
which amount would be due by January 31, 2021 and be approximately $20,000
resulting in an aggregate obligation of approximately $318,500.
The balance owed as of September 30, 2021 is $121,667.
Subsequently, the Company has made additional payments reducing the balance to $58,000 as of November 12, 2021.
Buda
Hotel Note.
In
November 2011, the Company executed a commercial loan agreement with Members Choice Credit Union totaling $4.8
million (“Buda Hotel Note”) to fund
the construction of the Buda Hotel, purchase equipment, establish adequate working capital, and pay closing costs. The note matures on
January
25, 2037 and is collateralized by a security interest
in the property and other assets within the property. The Company must pay principal and interest payments of $31,486
during the term of the note which are subject
to change to amortize the principal payments of the note. The note has a variable interest rate of Prime plus 2.75%
and is collateralized by a security interest in the property and other assets within the property. As of December 31, 2020, the Company
was in default with Members Choice Credit Union. Subsequently, on February 23, 2021, the Company signed a conditional temporary extension
agreement of the note through June 2021 whereby the Company has agreed to pay one installment of $20,000
in March 2021 and three installments of $10,000
in April, May, and June 2021 respectively under
the terms of the forbearance of the exercise of any remedies. On October 1, 2021, the Company completed the disposition of the Buda Hotel
for a gross sales price of approximately $4,350,000, subject to customary adjustments and the transfer of certain insurance proceeds
related to water damage to the property, for net proceeds to the Company after the payment of the mortgage loan of approximately $186,150.
In connection with this sale, this obligation was repaid in full
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Buda
Tax Loans.
In
February 2020, the Company executed a Promissory Note with TaxCORE Lending, LLC (“Buda 2020 Tax Loan”) for a principal amount
of $274,940 to finance property taxes associated with the Buda Hotel and to fully repay the Buda Tax Loan. The note matures on March
5, 2030 and is collateralized by a tax lien secured by the Buda Hotel located in Buda, Texas. The note has a fixed interest rate of 8.99%.
With adequate notice, the Company may prepay the note without penalty.
During
the period June 30, 2021, the Company refinanced the original note with TaxCORE lending on March 30, 2021 for a principal amount
of $466,713
at a fixed rate of 8.99%
and a maturity date of May
31, 2031. The note is collateralized by a tax
lien contract secured by the Buda Hotel located in Buda, Texas. The Original promissory note was executed in the year 2018 with Home
Tax Solutions totaling $98,070
(“Buda Tax Loan”) to fund the tax
obligation of the Buda Hotel. The note matures on June 2, 2028 and is collateralized by a tax lien secured by the Buda Hotel located
in Buda, Texas. The note has a fixed interest rate of 8.99%. In February 2020, this note was fully repaid with proceeds from the Buda
2020 Tax Loan. In connection with the sale of the Buda hotel property on October 1, 2021, this loan was repaid in full.
On August 18, 2021, the Company entered into a
settlement regarding the Buda Texas property taxes to approximately $141,000, which were paid by a cash payment by the Company including
net proceeds from a loan of the principal amount of $120,000, payable monthly over 12 months at no interest beginning in November 2021.
This loan is guaranteed by Cibolo Rodeo (a subsidiary of the Company) collateralized by the 2 acre parcel of land owned by Cibolo Rodeo
and a personal guarantee by BJ Parrish, the Chief Operating Officer of the Company.
2K Hospitality Secured Note.
On August 18, 2021, the Company through its subsidiary
that owned the Buda hotel property and a subsidiary that owns land located in Cibolo, Texas, jointly entered into a secured promissory
note with 2K Hospitality, LLC, in the principal amount of $120,000, payable without interests (assuming no payment default) in 12 monthly
payments commencing on November 1, 2021. The obligations are secured by a second mortgage on the Cibolo, Texas property. The obligations
of this note are guaranteed by BJ Parrish, a director and Chief Operating Officer of the Company.
Artesia
Note.
On
April 1, 2013, the Company executed a promissory note with FirstCapital Bank of Texas, N.A. for a principal amount of $314,500
(“Artesia Note”). the Company
executed an amendment to the Artesia Note on July 23, 2018 (“Amended Artesia Note”). The Amended Artesia Note had a principal
balance of $266,048
upon execution. The original maturity date of
the note was March 1, 2018, which was extended to June
23, 2033 in the Amended Artesia Note. The note
requires equal monthly principal and interest payments through maturity and has no prepayment penalties. The
note has a variable interest rate equal to the greater of 6.0% or the Prime rate plus 1.0%. The
note is collateralized by a security interest in the property and other assets within the property and is guaranteed by certain officers
and directors of the Company. As of September 30, 2021, the interest rate for this loan is 6%
(the
greater of 6% or the Prime rate of 3.25% plus 1.0%).
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Tamir
Note.
On
March 12, 2010, the Company executed a promissory note with Tamir Enterprises, Ltd. for a principal amount of $475,000 (“Tamir
Note”). The Company has executed subsequent amendments to the Tamir Notes on March 1, 2013, March 12, 2016, and March 19, 2019
(collectively, the “Amended Artesia Note”). The Amended Artesia Note had a principal balance of $300,000 upon execution.
As a result of the March 19, 2019 amendment, the maturity date of the note is March 12, 2022. The note requires monthly interest payments
through maturity and has no prepayment penalties. The note has a fixed interest rate of 12.0% plus an additional 2% for accrued interest
outstanding. The note is collateralized by a security interest in the property and other assets within the property and is guaranteed
by certain officers and directors of the Company.
Leander
Note.
On
October 5, 2018, the Company executed a loan agreement with Equity Security Investments for a principal amount of $700,000
(“Leander Note”) to refinance existing
financing for the hotel. The note had an original maturity date of October 5, 2019 and was collateralized by a security interest in the
property and other assets within the property and is guaranteed by certain officers and directors of the Company. The Company exercised
an extension option which extended the maturity of the note to October 5, 2020. The note required interest only monthly payments with
the full principal balance becoming due upon the maturity date. The note has a fixed interest rate 12.75%.
As of October 12, 2020, the
maturity of the note has been extended to April 5, 2021.
On
April 20, 2021, the Company has exercised a one-year extension option on the Leander note that extends the new maturity date to April
5, 2022. The note has a fixed interest rate of 12.75%, which requires payment of interest on monthly rest, until the Maturity Date, at
which time all outstanding principal and interest shall be finally due and payable.
Notes
Payable.
The
Company has notes payable to Cibolo Creek Partners, LLC, its affiliate Round Rock Development Partners, LP. These notes have a maturity
date of December 31, 2025, and there is no interest accruing on any of these notes. Each of these lenders was a related party
when the obligations were incurred. For more information, see Note 9 - Related Party Transactions.
|
|
7.
|
Commitments and Contingencies
|
Contingencies.
The
tenant, MCA Simpsonville Operating Company LLC, referred to as Tenant, of the MCA community that is located in Simpsonville, South Carolina,
referred to as the Simpsonville facility, and other affiliates of the Company have a dispute with the landlord of the Simpsonville Facility,
MC-Simpsonville, SC-UT, LLC, referred to as the Landlord, and its affiliates (Embree Group of Companies: Embree Construction Group, Inc.,
Embree Asset Group, Inc., and Embree Capital Markets Group, Inc., referred to collectively as Embree) under the terms of the lease regarding
alleged material construction and related defects of the Simpsonville Facility and other memory care facilities that have been built
by Embree and are leased by subsidiaries of MCA, including the significant costs and additional investment that was required by MCA to
remedy such defects. The Tenant has stopped paying rent and related charges under the lease for the Simpsonville Facility from and after
January 1, 2019. The Landlord has made demands for past rent but has not instituted legal action against the Tenant. Instead, the Landlord
filed a lawsuit against the guarantors of the lease, including Trident Healthcare Properties I, L.P., referred to as Trident, which is
a wholly owned subsidiary of the Company and an unconditional guaranty of such lease; and the personal guarantors of the Tenant’s
obligations under the Lease, including the Company’s Chairman and Chief Executive Officer. The Company has an obligation to indemnify
and hold such individuals (other than the Company’s Chairman) harmless under such personal guarantees, and Trident is a consolidated
subsidiary in the Company’s financial statements. The Company’s Chairman has indemnified the Company for all obligations
of the Company with respect to obligations to the Landlord in connection with this litigation, including the Company’s obligations
to such indemnified individuals and the Company’s subsidiaries. This litigation is captioned and numbered MC-Simpsonville, SC-UT,
LLC v. Steve Person, et. al., Cause No. 19-0651-C368 and is pending in the 368th Judicial District Court of Williamson County, Texas.
On October 21, 2020, the trial court has issued a judgment on damages in the amount of $2,801,365.
The trial court has not made findings of fact related to the Tenant’s liability under the Lease. Additionally, the Guarantors
has appealed the trial court judgement as they believed it has reasonable likelihood of success to reduce the judgment in the amount
of $248,074 in attorney’ fees. The appellate court recently entered a ruling reversing and remanding the attorneys’ fees
portion of the judgment to the trial court for renewed proceedings on that issue. After the entry of the appellate court’s ruling,
the Guarantors filed a motion for rehearing on the narrow issue of pre-judgment interest calculation, on which the Guarantors believe
that they have a reasonable likelihood of success. The Company has accrued an amount that it determines is reasonable with respect
to this contingency. The Landlord filed a second action against Trident and the other guarantors on April 9, 2021, for claims similar
to the action described above including relief for payment of rent past due and reimbursement of taxes from October 2020 to the time
of the trial in this action. Trident and the other guarantors intend to respond to this action. The Company is not able to determine
if it will prevail in such litigation. The Company has entered into an agreement to transfer certain operations, including
lease obligations, of the Simpsonville Facility. See Note 15 - Subsequent Events.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Certain
subsidiaries of the Company that operate hotel assets have not paid employment related taxes such as required withholdings for Texas
State unemployment taxes and federal income tax and employee and employer contributions for FICA (Social Security and Medicare) taxes,
and federal unemployment tax for the period from December 31, 2018 to December 31, 2019. 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, 2020, the amount of the estimated taxes, penalties, and interest, assuming that
there is no waiver or mitigation of the penalties, is $596,326. The Company has accrued this amount in its unaudited condensed
consolidated financial statements as of September 30, 2020.
A subsidiary of the Company has been sued by Naples
Property Ventures, LLC, alleging breach under a contract for sale of the Naples property and facility. In its complaint, Naples Property
Ventures, LLC is seeking specific performance under the contract. The complaint was served on November 10, 2021. The Company denies these
claims, is preparing a response to the complaint and believes that it has meritorious defenses or responses to these claims.
In addition, from time to time, the Company becomes
involved in litigation matters in the ordinary course of its business. Such litigations include an action that alleges negligence
and other claims regarding the death of a resident in a memory care facility. One
case is Michael Inderrieden, Individually and as Personal Representative of the Estate of Thomas Inderrieden v. MCA Simpsonville Operating
Company, LLC dba Memory Care of Simpsonville; Allied Integral United, Inc. dba Clearday; Memory Care America, LLC.; MCA Management Company,
Inc.; and MC-Simpsonville, SC-1-UT, LLC, which action was brought in South Carolina state court on July 7, 2021 in which the plaintiff
alleges various acts and breaches by the defendants that resulted in the death of a resident. Such action has been
referred to the Company’s insurance carrier and is in the discovery phase of litigation. Although the Company
is unable to predict with certainty the eventual outcome of any litigation, the Company does not believe any of its currently pending
litigation is likely to have a material adverse effect on its business.
Prior to the closing of the merger, on November
20, 2020, the landlord of the Company’s former headquarters, Prologis Texas III LLC, commenced an action asserting that the Company
breached its lease agreement. The Company has answered the compliant on January 11, 2021 and continues to believe that it has meritorious
defenses or responses to these claims.
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
a litigation and judgement against certain of our subsidiaries. We have been fully indemnified by James Walesa for all obligations that
the Company may incur with respect to an adverse judgement against the Company, including any post-judgement interest. Such indemnification
by James Walesa is under an agreement dated as of July 30, 2020. Under such agreement, James Walesa receives a fee equal to 2%
of the total amount payable by AIU or any of its subsidiaries which is payable in units of shares of the Clearday Care Preferred and
Clearday Warrants at $10.00
per unit, which is the same as the cash payment
for such units by third parties in the offering of such units by Clearday Care. In the event that Mr. Walesa is required to make any
payments under this indemnification, then Company will issue shares of Clearday Care Preferred and Clearday Warrants, at $10.00
per unit, for the amount of such payment.
Subsequently,
an amendment to the indemnification agreement above was signed on January 19, 2021 in which additional securities were pledged on behalf
of James Walesa for all obligations that Company may incur with respect to an adverse judgement and/or any post-judgement interest. In
the event that Mr. Walesa is required to make any payments under this amended indemnification agreement, then Company will issue shares
of AIU Care, AIU Warrants and AIU Common Stock at $10.00 per unit as well as Series A Preferred at $20.00 per unit, for the amount of
such payment.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Superconductor
Merger Commitment.
During
the nine months ended September 30, 2021, the Company agreed to pay Superconductor $120,000
per month beginning with February until June
30, 2021 (the “Operating Payments”) or an aggregate amount equal to $600,000,
subject to certain deferment. All such obligations were eliminated by consolidation upon the closing of the merger. In connection
with the merger, a liability to certain former officers of Superconductor was incurred under the terms of Officer
Agreements, which may be paid in Common Stock. The total value owed was accrued as of September 30, 2021 and is included in
the net assets acquired in the merger in the amount of $1,000,000.
Basic
net income (loss) per common share is calculated by dividing the net income (loss) attributable to common stockholders by the weighted-average
number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net income
(loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of
common shares and potentially dilutive securities outstanding for the period. For the Company’s diluted earnings per share calculation,
the Company uses the “if-converted” method for preferred stock and convertible debt and the “treasury stock”
method for Warrants and Options.
The
following tables set forth the potentially dilutive shares that were anti-dilutive in their respective periods as the Company had net
losses in 2021 and 2020, respectively.
Schedule of Anti-dilutive Shares Computation of Earnings (Loss) Per Share
|
Dilution
shares calculation
|
|
For
the Nine Months ended
September
30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Series A Convertible Preferred Stock
|
|
|
64
|
|
|
|
182
|
|
|
Series F 6.75% Convertible Preferred Stock
|
|
|
11,439,480
|
|
|
|
11,439,691
|
|
|
Series I 10.25% Convertible
Preferred Stock
|
|
|
1,789,495
|
|
|
|
567,561
|
|
|
Limited Partnership Units
|
|
|
2,864,607
|
|
|
|
1,392,028
|
|
|
Warrants
|
|
|
3,281,508
|
|
|
|
1,828,242
|
|
|
Stock Options
|
|
|
3,641
|
|
|
|
7,863
|
|
|
Total
participating securities
|
|
|
19,378,796
|
|
|
|
15,235,566
|
|
Reserved
2,860,800 shares of Common Stock that will be issued and distributed to holders of the Clearday, Inc. Series F Preferred Stock that do
not sell such shares until after the date that is six months after the effective date of the merger (Such shares being the 1,200,000
shares of AIU Common Stock reserved by AIU for issuance contingent on certain financial transactions.
|
|
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, 2021, Cibolo Creek
and Round Rock were owed $641,804
and $500,000
respectively by the Company.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Guarantees.
From
time-to-time certain officers and directors will personally guarantee a loan. There is a guarantee fee agreement in place that details
the amount of the fee as well as payment terms for certain executives in the Company. The amount of the fee is capped at 1% of the amount
of the outstanding note regardless of how many guarantors there are on the loan.
Agents.
Arkadios
Capital, LLC
The
Company’s president is currently a registered representative with Arkadios Capital LLC (“Arkadios”), a SEC full-service
broker dealer. The Company entered into a placement agreement with Arkadios as a broker agent in 2019 and have retained their services
as a non-exclusive placement agent in connection with the offering by AIU Alt Care and Clearday OZ Fund of their securities. No amounts
have been earned or paid under this arrangement to date.
|
|
10.
|
Non-Consolidated Investment
|
During the nine months ended September 30, 2021, the Company sold its
investment in one of their non-consolidated entities, Westover Town Center for a consideration of $1.4 Million to HR Interest
Inc. on dated April 19, 2021. Additionally, the Company recorded a gain on sale of this investment in the amount of $1,172,151.
On
May 28, 2021, the Company acquired all of the equity interests of Primrose Wellness Group LLC (“Primrose”), a San Antonio,
Texas licensed adult day care facility that provides affordable daily care services, including ADLs (activities of daily living), nursing
services, physical rehabilitative services and other supportive services, primarily to military veterans, including those with VA benefits.
The acquisition required the approval of the Texas Department of Health and Human Services. The Company plans to expand the daily activities
provided by Primrose including offering its proprietary Clearday Restore services, which provides a combination of aromatherapy and massage
therapy designed to help people with a wide range of lifestyle limiting conditions. The Company acquired Primrose for a cash purchase
price in the amount of $300,000 that is payable in three equal installments at the closing, and at six months after the closing and one
year after the closing. In connection with this acquisition, the Company modified the existing lease terms and guaranteed the lease obligations
in full and agreed to employ the two founders of Primrose. The acquisition was not a material acquisition under applicable accounting principles and, accordingly, pro forma information is not required
to be provided.
Since the acquisition in May 28, 2021, Primrose has generated approximately $150,000 in revenue and has a net loss of approximately $27,000
for the nine months ended September 30, 2021.
Schedule
Of Goodwill
|
|
|
Primrose Wellness Group, LLC
|
|
|
Merger
|
|
|
Goodwill as of January 1, 2021
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Goodwill arising from acquisitions
|
|
|
223,929
|
|
|
|
3,058,464
|
|
|
Goodwill as of September 30, 2021
|
|
$
|
223,929
|
|
|
$
|
3,058,464
|
|
|
|
●
|
For
Primrose acquisition information See Note 11 – Acquisitions
|
|
|
●
|
For
merger related information See Note 2 - Description of business, Basis of Presentation,
Summary of Significant Accounting Policies, Liquidity and Going Concern
|
In connection with the merger, the
certificate of incorporation of Clearday, Inc. was amended. Prior to such amendment, under the charter of Clearday, Inc.
(which was the charter of STI), there were 25,000,000 authorized
shares of Common Stock and 2,000,000 authorized
shares of preferred stock, each par value $0.001 per
share. The certificate of incorporation of Clearday, Inc., as amended in connection with the merger, provides for 80,000,000 authorized
shares of Common Stock and 10,000,000 authorized
shares of preferred stock, each par value $0.001 per
share.
Common Stock
Prior to the merger, Clearday, Inc. had 3,151,780
issued and outstanding shares of Common Stock, which included 400,000 shares held by AIU. The shares held by AIU were cancelled in connection
with the merger, resulting in 2,751,780 shares of issued and outstanding shares of Common Stock as of the effective time of the merger.
In connection with the merger, Clearday, Inc.
|
|
●
|
Effected
the 3.773585 -for-1 Reverse Stock Split and issued approximately 546,820 True Up Shares,
as described in Note 1.
|
|
|
●
|
Issued
13,638,395 shares of Common Stock to the holders of shares of AIU common stock.
|
|
|
●
|
Reserved
100,000 shares of Common Stock for the conversion or exchange of warrants and convertible securities
and shares to be issued to officers of STI under the Officer Agreements.
|
|
|
●
|
Reserved
2,860,800 shares of Common Stock that will be issued and distributed to holders of the Clearday, Inc. Series F Preferred
Stock that do not sell such shares until after the date that is six months after the effective
date of the merger (such shares being the 1,200,000 shares of AIU common stock reserved by AIU for issuance contingent on certain financial transactions).
|
STI
did not issue any restricted shares of the Common Stock for compensation during the nine month period ending September 30, 2021.
AIU
awarded restricted shares of its common stock in the amount of 453,316 shares (representing 1,080,984 shares of Clearday, Inc. Common
Stock) to various officers, directors and a consultant; during the nine months ended September 30, 2020. For the nine months ended September
30, 2021, AIU awarded restricted stock in the amount of 57,000 shares (representing 135,923 shares of Clearday, Inc. Common Stock) to
various officers and employees. Such shares of AIU common stock shares were vested for compensation for services in the amount of $570,000
during 2021.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
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.
Rights
and Preferences.
Holders
of common stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions applicable
to the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected
by, the rights of the holders of shares of any series of preferred stock, which the Company may designate and issue in the future.
Voting
Rights.
Each
holder of common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election
of directors. The Company’s amended and restated certificate of incorporation and amended and restated bylaws do not provide for
cumulative voting rights. Because of this absence of cumulative voting, the holders of a majority of the shares of common stock entitled
to vote in any election of directors can elect all of the directors standing for election, if they should so choose. In addition, the
Company’s amended and restated certificate of incorporation also provides that the Company’s directors may be removed only
for cause by the affirmative vote of the holders of at least 75% of the consolidated voting power of all the Company’s stockholders
entitled to vote on the election of directors, voting together as a single class.
Subject
to supermajority votes for some matters, matters shall be decided by the affirmative vote of the Company’s stockholders having
a majority in voting power of the votes cast by the stockholders present or represented and voting on such matter, provided that the
holders of the Company’s common stock are not allowed to vote on any amendment to the Company’s certificate of incorporation
that relates solely to the terms of one or more series of preferred stock if the holders of such affected series are entitled, either
separately or together with the holders or one or more such series, to approve such amendment. The affirmative vote of the holders of
at least 75% of the votes that all of the Company’s stockholders would be entitled to cast in any annual election of directors
and, in some cases, the affirmative vote of a majority of minority stockholders entitled to vote in any annual election of directors
are required to amend or repeal the Company’s bylaws, amend or repeal certain provisions of the Company’s certificate of
incorporation, approve certain transactions with certain affiliates, or approve the sale or liquidation of the Company. The
vote of a majority of minority stockholders applies when an individual or entity and its affiliates or associates together own more than
50% of the voting power of the Company’s then outstanding capital stock.
Preferred
Stock
Prior
to the merger, AIU had Series A 6.75% cumulative convertible preferred stock, $0.01
par value, 4,606,853
shares of such securities were issued and
outstanding as of December 31, 2020. Each share of Series A preferred stock has a stated value equal to the Series A original issue price.
The
conversion rate to the number of shares of AIU common stock is equal to 1 share for each share of Series A preferred stock.
In connection with the securities, they were either
converted into AIU common stock and then exchanged for the Company Common Stock or exchanged for shares of the Company’s Series
F 6.75% cumulative convertible preferred stock, $0.001
par value. The Company has 5,000,000
shares authorized with 4,797,052
and 4,606,853
issued and outstanding as of September 30,
2021 and December 30, 2020, respectively. The Series F Preferred Stock has a stated value of $20.00
per share is exchangeable at the option of the
holder into approximately 2.38
shares of the Company’s Common Stock, subject
to adjustment for specified fundamental transactions such as stock splits, reverse stock splits and stock combinations. See Note 14
- Preferred Stock – Mezzanine, for accounting treatment of the Series F Preferred Stock.
The
Series A Preferred Stock of the Company that was issued and outstanding prior to the merger remains issued and outstanding. Such preferred stock has a $.001 par value, 2,000,000 shares authorized, and 328,925 shares issued and
outstanding as of September 30, 2021 and December 31, 2020. Except for a preference on liquidation of $0.01 per share, each share of
Series A Preferred Stock is the economic equivalent of ten twelfths of a share of common stock into which it is convertible. Except as
required by law, the Series A Preferred Stock will not have any voting rights.
On
December 31, 2018, AIU acquired the businesses of certain affiliates and entities and issued AIU’s Series A Preferred
Stock (which has been exchanged for shares of the Company’s Series F Preferred Stock in the merger).
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Dividends
and Distributions
For
the Nine months ended September 30,2021 and September 30, 2020, the Company recognized dividends for the 6.75% Series F preferred stock
in the amount of $7,617,716
and $8,197,740
respectively. For the three months ended
September 30,2021 and 2020, the Company recognized dividends for the 6.75% Series F preferred stock in the amount of $2,089,878
and $2,712,400, respectively.
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 Merger Effective Date.
The
following is a summary of such outstanding warrants at September 30 2021:
Summary of Outstanding Warrants
|
|
|
Common
Shares
|
|
|
|
|
Total
|
|
|
Currently
Exercisable
|
|
|
Exercise
Price
per
Share
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants related to August 2016
financing
|
|
|
2,481
|
|
|
|
2,481
|
|
|
$
|
646.95
|
|
|
February 2, 2022
|
|
Warrants related to December 2016 financing
|
|
|
31,796
|
|
|
|
31,796
|
|
|
$
|
431.3
|
|
|
December 14, 2021
|
|
Warrants related to March 2018 financing
|
|
|
7,331
|
|
|
|
7,331
|
|
|
$
|
245.84
|
|
|
September 9, 2023
|
|
Warrants related to March 2018 financing
|
|
|
513
|
|
|
|
513
|
|
|
$
|
340.73
|
|
|
March 6, 2023
|
|
Warrants related to July 2018 financing
|
|
|
119,241
|
|
|
|
119,241
|
|
|
$
|
75.48
|
|
|
July 25, 2023
|
|
Warrants related to July 2018 financing
|
|
|
7,154
|
|
|
|
7,154
|
|
|
$
|
94.35
|
|
|
July 25, 2023
|
|
Warrants related to May 2019 financing
|
|
|
5,518
|
|
|
|
5,518
|
|
|
$
|
26.96
|
|
|
May 23, 2024
|
|
Warrants related to October 2019 financing
|
|
|
100,719
|
|
|
|
100,719
|
|
|
$
|
5.39
|
|
|
October 10, 2024
|
|
Warrants related to October 2019 financing
|
|
|
14,336
|
|
|
|
14,336
|
|
|
$
|
6.74
|
|
|
October 8, 2024
|
|
Warrants issued by AIU that after the merger (described below)
|
|
|
3,281,508
|
|
|
|
3,281,508
|
|
|
$
|
5.00
|
|
|
November 15, 2029
|
Warrants
that were issued by AIU and have been assumed by Clearday in the merger.
As
of September 30 2021, there are 1,376,118
warrants that were issued
by AIU to investors in the Alt Care Preferred and units
of limited partnership interests in Clearday OZ Fund. As of the effective date of the merger, such warrants were assumed by the Company
and amended and restated to represent the same number of shares of the Company’s Common Stock that would have been issued had the
holders exercised such warrants in full prior to the effective date of the merger, or an aggregate of 3,281,508
shares of the Company’s Common Stock. Each
warrant may be exercised for cash at an exercise price equal to $5.00
per share, subject to adjustment for specified
fundamental transactions such as stock splits, reverse stock splits and stock combinations.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Prior
to the closing of the merger, AIU issued to a consultant that is subject to an development agreement a warrant representing 500,000 shares
of the Company’s Common Stock as of the effective date of the merger at an exercise price of $11.00 per share, which may be paid
by customary cashless exercise. Such warrant is subject to adjustment for specified fundamental transactions such as stock splits, reverse
stock splits and stock combinations.
Stock
Options
At
September 30, 2021, we continued to have the two active equity award option plans, the 2003 Equity Incentive Plan and the 2013 Equity
Incentive Plan (collectively, the “Stock Option Plan”) that were in effect for STI prior to the effective date of the merger.
Although we can only grant new options under the 2013 Equity Incentive Plan. Under our Stock Option Plan, stock awards were made to our
former directors, key employees, consultants, and non-employee directors and consisted of stock options, restricted stock awards, performance
awards, and performance share awards. Stock options were granted at prices no less than the market value on the date of grant. There
were no stock option exercises during the three and nine months ended September 30, 2021. None of the option grantees continued in service
after the effective date of the merger. The expiration date for all of the options under the Stock Option Plan granted to any officer,
director or consultant is generally the last day of the three (3)-month period following the date that such person ceases their continuous
status in such capacity, subject to certain accelerated termination events that are not applicable.
As
of September 30, 2021, the aggregate outstanding options under the Stock Option Plan was 7,851
shares, at an exercise
price per share of $19.20
to $26,280
with a weighted average
exercise price of $211.21.
All such options were exercisable. The Stock Option Plan provides for proportionate adjustment to the number of shares represented by
the options and the exercise price for certain events,
including the reverse stock split and the issuance of the True Up Shares that were effected in connection with the merger. After such
adjustments, the aggregate number of shares represented by the options is 3,641
and the price per share is between $41.40
and $56,672.74,
with a weighted average exercise price equal to $455.54.
At
September 30, 2021, no
options had an exercise price less than the current
market value. All of the stock options award that were outstanding as of September 30, 2021 were to officers and directors whose service
terminated on September 9, 2021 in connection with the merger. Accordingly, all such options that have not been exercised on December
8, 2021 shall expire.
Restricted
Stock
On
March 31, 2021, AIU issued an additional 57,000
total shares of restricted common stock
to executives of AIU representing approximately 135,600 shares of Clearday, Inc. Common Stock. For the nine months ended
September 30, 2021, shares issued of restricted common stock vest over 33 months and the Company valued the 57,000
shares at $10
per share, on the date of the agreement.
As
of September 30, 2021, the Company has awarded restricted stock worth $5,103,160 or 510,316 shares to various officers, directors and
consultants that will be amortized over the requisite service period. As of September 30, 2021, there was $1,489,540 in unamortized stock
compensation
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
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 $0.01
per share that authorizes the issuance
of 1,500,000
shares of preferred stock and 1,500,000
of common stock and designated 700,000
as Series I Preferred Stock.
Each share of Series I Preferred Stock has a stated value equal to the Series I Preferred Stock original issue price. For
the three months ended September 30, 2021 and 2020, $0 and $400,000 was invested in AIU Alt Care, respectively in exchange for 0 and
40,000 shares of such preferred stock, respectively. For the nine months ended September 30, 2021 and 2020, $897,000
and $955,000
was invest in AIU Alt Care, respectively in exchange
for 89,700
and 95,500
shares of such preferred stock, respectively.
In
October 2019, AIU Alt Care formed AIU Impact Management, LLC and they formed Clearday OZ Fund which is managed by AIU Impact Management,
LLC, as the general partner. For the three months ended September 30, 2021 and 2020, $1,431,455
and $0
was invested in Clearday Oz Fund, respectively,
respectively. For the nine months ended September 30, 2021 and 2020, $2,444,725
and $400,000
was invested in Clearday Oz Fund, respectively.
The
exchange rate for each of the Alt Care Preferred Stock and the limited partnership units in Clearday OZ Fund to Clearday, Inc. Common
Stock is equal to (i)
the aggregate investment amount for such security plus accrued dividends at 10.25% per annum, (ii) divided by 80% of the 20 consecutive
day volume weighted closing price of the Common Stock of Clearday preceding the conversion date. Prior to the merger, these securities
were exchangeable to shares of AIU common stock at a rate of 1 share for every $10.00 of aggregate amount of the investment
plus such accrued dividends.
On
March 31, 2020, AIU Alt Care entered into an independent consulting agreement, or the Consulting Agreement, pursuant to which the Company
issued 5,000
shares of AIU Alt Care Preferred Stock to the
Consultant as partial consideration for financial services rendered. In connection with this transaction, the Company valued the 5,000
shares of AIU Alt Care Preferred Stock at $10
per share for $50,000,
on the date of the agreement. The vesting date is September 9, 2022.
A
certain officer was repaid $175,000
in the first quarter of 2020 towards a $500,000
payable that was owed; the remaining balance
of $325,000
was converted as of September 30, 2020 to 32,500
shares of Alt Care Preferred Stock and 32,500
warrants to purchase shares of the Company’s
common stock. In November 2020, the same officer was issued 6,000
Preferred shares in exchange for a $60,000
guaranty fee.
See Note 7 – Indemnification Agreements
Non-Controlling
Interest Loss Allocation.
The Company applied ASC 810-10 guidance to
correctly allocate the percentage of loss attributable to the NCI of each company. For the nine months ended September 30, 2021, the
loss for AIU Alt Care is $559,270
and Clearday Oz Fund is $334,712.
Additionally, for the nine months ended September 30, 2020, the losses for both AIU Alt Care and Clearday OZ were $423,742
and $1,267,440,
respectively. Based on 99%
ownership interest, AIU Alt Care and Clearday OZ fund incurred a loss attributable to the NCI in the amount of $553,677
and $331,364,
respectively in 2021 and incurred losses of $419,506
and $1,254,766,
respectively, for 2020.
Cumulative
Convertible Preferred Stock and Limited Partnership Interests in Subsidiaries (NCI).
For the nine months ended September 30, 2021,
AIU Alt Care closed subscriptions and issued and sold 89,700 shares of Series I Cumulative Convertible Preferred Stock (the “Alt
Care Preferred Stock”), par value $0.01 per share, and 244,473 units of limited partnership interests in Clearday OZ Fund.
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, 2021, AIU Alt Care and Clearday OZ fund has issued 1,270,515 and 2,010,150 warrants, respectively.
Each
warrant has a term of ten years and provides for the purchase of the 1 share of the Company’s common stock at a cash exercise price
equal to 50% of the price per share of the Company’s common stock when the Company becomes a public company by filing a registration
statement, reverse merger or other transaction. The number of shares of the Company’s common stock and the warrant exercise price
will be subject to adjustment for stock dividends, stock splits, combinations or other similar recapitalizations after the initial exercise
price has been determined.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
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 (10.25%) on the original issue price of the Alt Care Preferred Stock
or the units limited partnership interests. Dividends will either (a) be payable in cash, if and to the extent declared by the board
of directors or the general partner, or (b) by issuing Dividend Shares equal to the aggregate accrued dividend divided by the Series
I Original Issue Price. Dividends, if noticed to the Holder, will be payable after the Dividend Payment Date.
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.
|
|
14.
|
Preferred Stock - Mezzanine
|
The Company has 10,000,000
shares of preferred stock authorized, par value $0.001
per share, including 5,000,000
designated as Series F Preferred Stock and 4,797,082 shares outstanding as of September 30, 2021. 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
mezzanine or 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, 2021. Therefore, the
Company is not currently required to accrete the Series F Preferred Stock to the aggregate liquidation value.
The
Company did not recognize a benefit or provision for income taxes for the nine months ended September 30, 2021 and September 30, 2020.
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 100% valuation allowance as of September 30, 2021 and September 30, 2020 is necessary at this time.
Schedule
of Tax Provision
|
|
|
2021
|
|
|
2020
|
|
|
|
|
For
the three months ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Current tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
Total current tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
Deferred Tax provision:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
Total deferred tax provision
|
|
|
-
|
|
|
|
-
|
|
|
Total tax provision
|
|
$
|
-
|
|
|
$
|
-
|
|
Schedule of Federal Statutory Income Tax Rate
|
|
|
For
the Three Months ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Taxes at statutory U.S. federal
income tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
State and local income taxes, net of federal
tax benefit
|
|
|
6.7
|
%
|
|
|
6.9
|
%
|
|
Other differences, net
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Valuation allowance
|
|
|
-27.7
|
%
|
|
|
-27.9
|
%
|
|
Effective tax rate
|
|
|
-
|
%
|
|
|
-
|
%
|
We
evaluated subsequent events and transactions occurring after September 30, 2021 through the date of this Report.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
Sale
of the Buda Property.
On
October 1, 2021, Pritor Longhorn Buda Hotel, LLC, a subsidiary of the Company (“Buda”), completed the disposition of one
of the Company’s non-core assets: an improved property located in Buda, Texas (the “Buda Property”) that was previously
operated as a franchised hotel. As previously reported, the operations for the Company’s hotel properties that it owned during
2020, including the Buda Property, were effectively suspended in response to the COVID-19 pandemic in April, 2020. The Buda Property
was one of the Company’s assets held for disposition.
The
sales price attributable for the Buda Property was $4,350,000, subject to customary adjustments and prorations and further adjusted by
a net increase of approximately $402,000 for insurance proceeds related to certain casualty claims related to the property. The Buda
Property was subject to a mortgage note and other long term obligations in the aggregate of approximately $4,500,000 including a mortgage
note in favor of bank lender that was in default and subject to forbearance and financing by a lender that was used to pay the property
taxes on the Buda Property and additional financing that was incurred by Buda on August 18, 2021 by the Buda Property buyer of $120,000
which was used to pay related occupancy taxes. The net proceeds from the sale of the Buda Property, including these claims and other
adjustments including customary prorations, was approximately $186,154, which includes an accommodation by the mortgage lender to reduce
the mortgage obligations. The $120,000 seller note is payable in 12 equal monthly installments beginning November 1, 2021. This note
is guaranteed by BJ Parrish, a Company executive officer and director, and one of the Clearday subsidiaries which granted a security
interest unimproved property held by a Company subsidiary that subordinate to such property mortgage.
The
sale of the Buda Property completes the sale or disposition of all of the Company’s hotel properties and relieves approximately
$4,500,000 of financing liabilities and approximately $4,100,000 of long term assets, net of accumulated depreciation, from the Company’s
consolidated balance sheet.
Sale
of Undivided Interests in the Naples Property.
The
Company sold undivided interests in the land and improvements (the “Naples Property”) that are used for its Memory
Care of Naples care facility that is located in Naples, Florida (the “Naples Facility”). The purchase agreement provides
that an aggregate cash amount of $3,141,000
was received by Clearday for the sale of undivided
interests equal to 67.36%
of the aggregate interests in the Naples Property.
The remaining 32.64%
of the undivided interests in the Naples Property
will be retained by MCA Naples, LLC. The undivided property interests will be held as a tenancy in common under the terms of a Tenant
in Common Agreement (“TIC Agreement”). The closing of the purchase and sale of the undivided interests is subject to the
closing conditions set forth in the purchase agreement, including the consent to purchase and sale by the existing mortgage lender or
refinancing of the mortgage debt. The purchase agreement provided for a non-refundable advance of the purchase price. Accordingly, the
aggregate purchase price amount has been received by the Company. This transaction was reported by the Company in a Current Report on
Form 8K that was filed on November 1, 2021.
Receipt
of ERTC Refunds.
The
Company received an additional $650,000 in refunds in the fourth quarter from the overpayment of employer taxes under
the employee retention tax credit (“ERTC”) for certain of our employees under the CARES Act with respect to payments made
by us during the second and third quarters of 2021. As of November 12, 2021, we have received $2,201,316
of such refunds.
Joint Venture for the Development of Robotic
Services.
On November 11, 2021, we entered into a Strategic
Alliance, Development and Distribution Terms Agreement (the “JV Agreement”) with Invento Research Inc. (“Invento”)
to focus on the development and deployment of robotic services that combine content and uses (or robotic applications) that empower,
enhance and protect care workers providing services in the following (collectively, the “JV Core Business Market”): (1) the
home and residential health and non-acute care markets, (2) residential care facilities such as assisted living, nursing home, skilled
nursing and memory care facilities, (3) health care markets through hospitals, doctor offices, ambulatory surgical care centers, urgent
care centers, and medical clinics, and (4) laboratories (e.g., facilities that administer blood testing services), occupational and physical
therapy centers, and (5) telehealth applications.
