Notes
to Unaudited Condensed Consolidated Financial Statements
| 1. |
Organization, Description of Organization,
Basis of Presentation, Summary of Significant Accounting Policies, Liquidity and Going Concern |
Description
of Business
Clearday,
Inc., a Delaware corporation (the “Company”), formerly known as Superconductor Technologies Inc., was established in
1987 and closed a merger (the “AIU Merger”) with Allied Integral United, Inc., a Delaware corporation
(“AIU”), on September 9, 2021. This merger was described in our registration statement (“Merger Registration
Statement”) on Form S-4, as amended and supplemented (Registration No. 333-256138). Prior to the closing of the AIU Merger, the
Company was a leading company in developing and commercializing high temperature superconductor (“HTS”) materials and
related technologies. As described in the Merger Registration Statement, after the AIU Merger, the Company continued the businesses of
AIU and continued the businesses of the Company related to its Sapphire Cryocooler and its related patents and intellectual
property. AIU was incorporated on December 20, 2017 and began its business on December 31, 2018 when it acquired the businesses of
five (5) memory care residential facilities and other businesses (the “2018 Acquisition”). The memory care business is
conducted through the Company’s Memory Care America LLC subsidiary (“MCA”), which has been in the residential care
business since November 2010 and has been managed by the Company’s executives for approximately 6 years. Since the 2018
Acquisition, the Company has been developing innovative care and wellness products and services focusing on the older American
market.
All
of the Company’s assets that were acquired in the 2018 Acquisition and are not related to the memory care facilities or the
non-acute care and wellness industry were designated as non-core businesses and held for disposition. Accordingly, such assets and
liabilities are classified as held for sale in the unaudited condensed consolidated balances sheets as of September 30, 2022, and
December 31, 2021. Additionally, the results of operations for these non-core businesses are classified as income from discontinued
operations within the unaudited condensed consolidated statements of operations for the three and nine months ended September 30,
2022 and used in 2021.
Liquidity
and Going Concern
The
Company has incurred significant cumulative consolidated operating losses and negative cash flows. As of September 30, 2022, the
Company has an accumulated deficit of a net loss from continuing operations of $5,641,588 offset by income from discontinued operations of $411,523 for
the nine months ended September 30, 2022.
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 does 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.
| 2. |
Summary of Significant Accounting
Policies |
Principles
of Consolidation
The
accompanying unaudited condensed consolidated financial statements include the accounts of the Company, including its wholly owned
subsidiaries. In 2019, AIU Alternative Care, Inc., a Delaware corporation (“AIU Alt Care”), and Clearday Alternative
Care Oz Fund, L.P, a Delaware limited partnership (“Clearday OZ Fund”), were formed by AIU. The Company owns all of the
voting interests of AIU Alt Care and AIU Alt Care is the sole general partner of Clearday OZ Fund, and less than 1% of the preferred
economic interests in such companies.
In
November, 2019, AIU Alt Care filed a certificate of designation that authorized preferred stock designated as the Series I, 10.25%
cumulative convertible preferred stock, par value $0.01
per share (the “ AIU 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 AIU Alt Care Preferred Stock; and 1,500,000
of common stock. Each share of The Alt Care Preferred Stock has a stated value equal to the $10.00
Alt Care Preferred Stock original issue price.
In
October, 2019, AIU Alt Care formed AIU Impact Management, LLC and Clearday OZ Fund was formed. AIU Impact Management, LLC manages Clearday
OZ Fund as its general partner, owns 1% of Clearday OZ Fund and allocates 99% of income gains and losses accordingly to the limited partners.
The
exchange rate for each of the AIU 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 AIU
Merger, this exchange rate was 1 share for every $10.00 of aggregate amount of the investment plus such accrued and unpaid
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 statements of operations.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
The
accompanying unaudited condensed consolidated financial statements should be read in conjunction with the annual financial statements
of the Company and of AIU that are contained in the Company’s Form 10-K, as amended and supplemented. In the opinion of our management,
all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All
intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated upon consolidation. Our operating
results for interim periods are not necessarily indicative of the results that may be expected for the full year.
Basis
of Presentation
The accompanying unaudited financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.
Accordingly, they do not include all of the information and notes required GAAP in the United States of America for complete
financial statements. In the opinion of the Company’s management, any adjustments contained in the accompanying unaudited
consolidated financial statements are of a normal recurring nature, and are necessary to fairly present the financial position of
the Company as of September 30, 2022, along with its results of operations for the three and nine months period ended September 30,
2022 and 2021 and cash flows for the three and nine month periods ended September 30, 2022 and 2021. Interim financial statements
are prepared on a basis consistent with the Company’s annual financial statements and should be read in conjunction with our
Annual Report on Form 10-K for the year ended December 31, 2021. Results of operations for the three and nine month periods ended
September 30, 2022 and 2021, are not necessarily indicative of the operating results that may be expected for the full year ending
December 31, 2022.
Unaudited
Interim Financial Information
The
unaudited condensed consolidated financial statements as of September 30, 2022 have been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission (“SEC”) and GAAP. Accordingly, these condensed consolidated financial statements do not include
all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of the Company, these
unaudited interim condensed consolidated financial statements contain all adjustments necessary, all of which are of a normal and recurring
nature, to present fairly the Company’s financial position, results of operations and cash flows. Interim results are not necessarily
indicative of results for a full year or future periods. These condensed consolidated financial statements should be read in conjunction
with the Company’s audited consolidated financial statements for the year ended December 31, 2021, as well as the audited consolidated
financial statements of Clearday that are included in our Annual Report on Form 10-K, as amended and supplemented.
Use
of Estimates
The
preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities and contingencies at
the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods presented.
Management believes that these estimates and assumptions are reasonable, however, actual results may differ and could have a material
effect on future results of operations and financial position.
Significant
estimates in our condensed consolidated financial statements relate to revenue recognition, including contractual allowances, the allowance
of doubtful accounts, self-insurance reserves, long-lived assets, impairment of long-lived assets and estimates concerning our provisions
for income taxes.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
Fair
Value of Financial Instruments
The
Company’s financial instruments are limited to cash, accounts receivable, accounts payable, operating
leases and mortgage notes payable. The fair value of these financial instruments was not materially different from their carrying values
on September 30, 2022.
Segment
Reporting
Operating
segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation
by the chief operating decision-maker, the Chief Executive Officer, in making decisions regarding resource allocation and assessing performance.
The Company views its operations and manages its business as one operating segment.
Cash
and Restricted Cash
Cash,
consisting of short-term, highly liquid investments and money market funds with original maturities of nine months or less at the date
of purchase, are carried at cost plus accrued interest, which approximates market.
Restricted
cash as of September 30, 2022 and December 31, 2021 includes cash that the Company deposited as security for obligations arising from
property taxes, property insurance and replacement reserve the Company is required to establish escrows as required by its mortgages
and certain resident security deposits.
Investments
The
Company follows Accounting Standard Update 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The Company has no investment in securities as of
September 30, 2022 and December 31, 2021.
Goodwill
Goodwill,
which has an indefinite useful life, represents the excess of purchase consideration over fair value of net assets acquired. The Company
determines whether goodwill may be impaired by comparing the carrying value of the single reporting unit, including goodwill, to the
fair value of the reporting unit. If the fair value is less than the carrying amount, a more detailed analysis is performed to determine
whether goodwill is impaired. The impairment loss, if any, is measured as the excess of the carrying value of the goodwill over the implied
fair value of the goodwill and is recorded in the Company’s consolidated statements of operations.
Software
Capitalization
With
regards to developing software, any application costs incurred during the development state, both internal expenses and those paid to
third parties are capitalized. At September 30. 2022 and December 31, 2021, $3,223,525 and $1,783,525, respectively were the balances
that will be amortized based on the useful life. These costs are included in the furniture fixture and equipment line on Note 3.
Risks
and Uncertainties
The
Company’s financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash,
and trade receivables. At certain times throughout the year, the Company may maintain deposits in federally insured financial
institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not
exposed to significant risk on its cash balances due to the financial position of the depository institutions in which those deposits
are held. The Company performs ongoing credit evaluations of its customers, and the risk with respect to trade receivables is further
mitigated by the diversity, both by geography, of the customer base.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
On
March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was adopted.
The
CARES Act appropriated funds for the U.S. Small Business Administration Paycheck Protection Program (“PPP”) loans that are
forgivable in certain situations and employment related tax credits to promote continued employment, as well as Economic Injury Disaster
Loans to provide liquidity to small businesses harmed by COVID-19. The Company continues to examine the impact that the CARES Act may
have on its business and is currently, unable to determine the impact that the CARES Act will have on its financial condition, results
of operations, or liquidity.
The
Company is also considering other applicable federal and state programs, including the Families First Coronavirus Response Act, which
is a federal law meant to respond to the economic impacts of the ongoing COVID-19 pandemic that provides certain credits to employers,
and the Work Opportunity Tax Credit “WOTC”, which is a federal tax credit available to employers who invest in American job seekers who
have consistently faced barriers to employment. Employers may meet their business needs and claim a tax credit if they hire an individual
who is in a WOTC targeted group.
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
| Allowance
for Doubtful Accounts | |
Balance
at Beginning of Period | | |
Provision
for Doubtful Accounts | | |
Write-Offs | | |
Balance
at
End of Period | |
| December
31, 2021 | |
$ | 68,911 | | |
$ | 108,360 | | |
$ | (177,277 | ) | |
$ | - | |
| September
30, 2022 | |
| - | | |
$ | - | | |
$ | - | | |
$ | - | |
Assets
and Liabilities Held for Sale
The
Company has classified its real estate as held for sale as these are non-core assets no longer used in operations. The Company recorded
these assets as the less of cost or carrying value.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
Property
and Equipment
Property
and equipment are recorded at cost and depreciated using the straight-line basis over their estimated useful lives, which are typically
as follows:
Schedule
of Estimated Useful Lives
| Asset
Class | |
Estimated
Useful Life (In Years) | |
| Buildings | |
| 39 | |
| Building
improvements | |
| 39 | |
| Equipment | |
| 7 | |
| Computer
equipment and software | |
| 5 | |
| Furniture
and fixtures | |
| 7 | |
The
Company regularly evaluates whether events or changes in circumstances have occurred that could indicate impairment in the value of the
Company’s long-lived assets. If there is an indication that the carrying value of an asset is not recoverable, the Company determines
the amount of impairment loss, if any, by comparing the historical carrying value of the asset to its estimated fair value, with any
amount in excess of fair value recognized as an expense in the current period. The Company determines estimated fair value through an
evaluation of recent financial performance, recent transactions for similar assets, market conditions and projected cash flows using
standard industry valuation techniques. Undiscounted cash flow projections and estimates of fair value amounts are based on a number
of assumptions such as revenue and expense growth rates, estimated holding periods and estimated capitalization rates (Level 3).
Valuation
of Long-Lived Assets
Long-lived
assets to be held and used, including property and equipment, right to use assets and definite life intangible assets, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Note
3 - Real Estate, Property and Equipment, Net.
Gain
(Loss) on Sale of Assets
The
Company enters into real estate transactions which may include the disposal of certain commercial shopping centers and hotels, including
the associated real estate; such transactions are recorded in Note 5 – Discontinued Operations. The Company recognizes gain or loss from the sale of equity
method investments when the transfer of control is complete, and the Company has no continuing involvement with the transferred financial
assets.
Legal
Proceedings and Claims
The
Company has been, is currently, and expects in the future to be involved in claims, lawsuits, and regulatory and other government audits,
investigations and proceedings arising in the ordinary course of the Company’s business, some of which may involve material amounts.
The Company establishes accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the
amount of the loss can be reasonably estimated. Also, the defense and resolution of these claims, lawsuits, and regulatory and other
government audits, investigations and proceedings may require the Company to incur significant expense. The Company accounts for claims
and litigation losses in accordance with FASB, Accounting Standards Codification™, or ASC, Topic 450, “Contingencies.” Under FASB
ASC Topic 450, loss contingency provisions are recorded for probable and estimable losses at the Company’s best estimate of a loss
or, when a best estimate cannot be made, at the Company’s estimate of the minimum loss. These estimates are often developed prior
to knowing the amount of the ultimate loss, require the application of considerable judgment, and are refined as additional information
becomes known. Accordingly, the Company is often initially unable to develop a best estimate of loss and therefore the estimated minimum
loss amount, which could be zero, is recorded; then, as information becomes known, the minimum loss amount is updated, as appropriate.
Occasionally, a minimum or best estimate amount may be increased or decreased when events result in a changed expectation.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
Lease
Accounting
The
Company follows FASB ASC Topic 842, “Leases”, or ASC Topic 842, utilizing the modified retrospective transition method with no adjustments
to comparative periods presented. The Company has elected the practical expedient to account for each separate lease component of a contract
and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized.
Lessee
The
Company regularly evaluates whether a contract meets the definition of a lease whenever a contract grants a party the right to control
the use of an identified asset for a period of time in exchange for consideration. To the extent the identified asset is able to be shared
among multiple parties, the Company has determined that one party does not have control of the identified asset and the contract is not
considered a lease. The Company accounts for contracts that do not meet the definition of a lease under other relevant accounting guidance
(such as ASC 606 for revenue from contacts with customers).
The
Company’s lease agreements primarily consist of building leases. These leases generally contain an initial term of 15 to 17
years and may contain renewal options. If the Company’s lease agreements include renewal option periods, the Company includes
such renewal options in its calculation of the estimated lease term when it determines the options are reasonably certain to be
exercised. When such renewal options are deemed to be reasonably certain, the estimated lease term determined under ASC Topic 842
will be greater than the non-cancelable term of the contractual arrangement.
The
Company classifies its lessee arrangements at inception as either operating leases or financing leases. A lease is classified as a financing
lease if at least one of the following criteria is met: (1) the lease transfers ownership of the underlying asset to the lessee, (2)
the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (3) the lease
term is for a major part of the remaining economic life of the underlying asset, (4) the present value of the sum of the lease payments
equals or exceeds substantially all of the fair value of the underlying asset, or (5) the underlying asset is of such a specialized nature
that it is expected to have no alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease
if none of the five criteria described above for financing lease classification is met. The Company has no financing leases as of September
30, 2022.
Right of use assets “ROU” assets associated with operating
leases are included in “Operating Lease Right of Use Asset” on the Company’s unaudited condensed balance sheet. Current
and long-term portions of lease liabilities related to operating leases are included in “Current Portion of Operating Lease Liabilities”
and “Operating Lease Liabilities, net of Current Portion” on the Company’s balance sheets as of September 30, 2022.
ROU assets represent the Company’s right to use an underlying asset for the estimated lease term and lease liabilities represent
the Company’s present value of its future lease payments. In assessing its leases and determining its lease liability at lease commencement
or upon modification, the Company was not able to readily determine the rate implicit for its lessee arrangements, and thus has used its
incremental borrowing rate on a collateralized basis to determine the present value of the lease payments. The Company’s ROU assets
are measured as the balance of the lease liability plus or minus any prepaid or accrued lease payments and any unamortized initial direct
costs. Operating lease expenses are recognized on a ratable basis, regardless of whether the payment terms require the Company to make
payments annually, quarterly, monthly, or for the entire term in advance. If the payment terms include fixed escalator provisions, the
effect of such increases is recognized on a straight-line basis. The Company calculates the straight-line expense over the contract’s
estimated lease term, including any renewal option periods that the Company deems reasonably certain to be exercised.
The
Company reviews the carrying value of its ROU assets for impairment, similar to its other long-lived assets, whenever events or changes
in circumstances indicate that the carrying amounts may not be recoverable. The Company could record impairments in the future if there
are changes in (1) long-term market conditions, (2) expected future operating results or (3) the utility of the assets that negatively
impact the fair value of its ROU assets.
Lessor
The
Company’s lessor arrangements primarily included tenant contracts within shopping centers, which is included in discontinued operations.
The Company classifies its leases at inception as operating, direct financing, or sales-type leases. A lease is classified as a sales-type
lease if at least one of the following criteria is met: (1) the lease transfers ownership of the underlying asset to the lessee, (2)
the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (3) the lease
term is for a major part of the remaining economic life of the underlying asset, (4) the present value of the sum of the lease payments
equals or exceeds substantially all of the fair value of the underlying assets or (5) the underlying asset is of such a specialized nature
that it is expected to have no alternative use to the lessor at the end of the lease term. Furthermore, when none of the above criteria
is met, a lease is classified as a direct financing lease if both of the following criteria are met: (1) the present value of the of
the sum of the lease payments and any residual value guaranteed by the lessee, that is not already reflected in the lease payments, equals
or exceeds the fair value of the underlying asset and (2) it is probable that the lessor will collect the lease payments plus any amount
necessary to satisfy a residual value guarantee. A lease is classified as an operating lease if it does not qualify as a sales-type or
direct financing lease. Currently, the Company classifies all of its lessor arrangements as operating leases.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
Revenues
from the Company’s lessor arrangements are recognized on a straight-line, ratable basis over the fixed, non-cancelable term of
the relevant tenant contract, regardless of whether the payments from the tenant are received in equal monthly amounts during the life
of a tenant contract. Certain of the Company’s tenant contracts contain fixed escalation clauses (such as fixed-dollar or fixed-percentage
increases) or inflation-based escalation clauses (such as those tied to the change in CPI) and is included in discontinued operations.
If the payment terms call for fixed escalations, upfront payments, or rent-free periods, the rental revenue is recognized on a straight-line
basis over the fixed, non-cancelable term of the agreement. When calculating straight-line site rental revenues, the Company considers
all fixed elements of tenant contractual escalation provisions.
Certain
of the Company’s arrangements with tenants contain both lease and non-lease components. In such circumstances, the Company has
determined (1) the timing and pattern of transfer for the lease and non-lease component are the same and (2) the stand-alone lease component
would be classified as an operating lease. As such, the Company has aggregated certain non-lease components with lease components and
has determined that the lease components represent the predominant component of the arrangement.
Income
Taxes
The
Company’s income tax expense includes U.S. income taxes. Certain items of income and expense are not reported in tax returns and
financial statements in the same year. The Company accounts for income taxes under the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences to be included in the Company’s unaudited
condensed consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the
differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse, while the effect of a change in tax rates on deferred tax assets and liabilities is recognized
in income in the period that includes the enactment date.
The
Company can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained
upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with
a tax position is measured as the largest amount that has a greater than 50% likelihood of being realized.
Changes
in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred
tax assets will be recovered from future taxable income and, to the extent, the Company believes that the Company is more likely than
not that all or a portion of deferred tax assets will not be realized, the Company establishes a valuation allowance to reduce the deferred
tax assets to the appropriate valuation. To the extent the Company establishes a valuation allowance or increase or decrease this allowance
in a given period, the Company includes the related tax expense or tax benefit within the tax provision in the unaudited condensed consolidated
statement of operations in that period. In making such a determination, the Company considers all available positive and negative evidence,
including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results
of recent operations. In the future, if the Company determines that it would be able to realize its deferred tax assets in excess of
their net recorded amount, the Company will make an adjustment to the deferred tax asset valuation allowance and record an income tax
benefit within the tax provision in the unaudited condensed consolidated statement of operations in that period.
The
Company pays franchise taxes in certain states in which it has operations. The Company has included franchise taxes in general and administrative
and operating expenses in its unaudited condensed consolidated statements of operations.
Revenue
Recognition
The
Company recognizes revenue from contracts with customers in accordance with ASC Topic 606, “Revenue from Contracts with Customers”,
or ASC Topic 606, using the practical expedient in paragraph 606-10-10-4 that allows for the use of a portfolio approach, because
we have determined that the effect of applying the guidance to our portfolios of contracts within the scope of ASC Topic 606 on our unaudited
condensed consolidated financial statements would not differ materially from applying the guidance to each individual contract within
the respective portfolio or our performance obligations within such portfolio. The five-step model defined by ASC Topic 606 requires
the Company to: (i) identify its contracts with customers, (ii) identify its performance obligations under those contracts, (iii) determine
the transaction prices of those contracts, (iv) allocate the transaction prices to its performance obligations in those contracts and
(v) recognize revenue when each performance obligation under those contracts is satisfied. Revenue is recognized when promised goods
or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services.
A
substantial portion of the Company’s revenue at its independent living and assisted living communities relates to contracts with
residents for services that are generally under ASC Topic 606. The Company’s contracts with residents and other customers that
are within the scope of ASC Topic 606 are generally short-term in nature. The Company has determined that services performed under those
contracts are considered one performance obligation in accordance with ASC Topic 606 as such services are regarded as a series of distinct
events with the same timing and pattern of transfer to the resident or customer. Revenue is recognized for those contracts when the Company’s
performance obligation is satisfied by transferring control of the service provided to the resident or customer, which is generally when
the services are provided over time.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
Resident
fees at our independent living and assisted living communities consist of regular monthly charges for basic housing and support services
and fees for additional requested services, such as assisted living services, personalized health services and ancillary services. Fees
are specified in our agreements with residents, which are generally short term (30 days to one year), with regular monthly charges billed
in advance. Funds received from residents in advance of services provided are not material to our unaudited consolidated financial statements.
Some of our senior living communities require payment of an upfront entrance fee in advance of a resident moving into the community;
substantially all of these community fees are non-refundable and are initially recorded as deferred revenue and included in accrued expenses
and other current liabilities in our unaudited condensed consolidated balance sheets. These deferred amounts are then amortized on a
straight-line basis into revenue over the term of the resident’s agreement. When the resident no longer resides within our community,
the remaining deferred non-refundable fees are recognized in revenue. Revenue recorded and deferred in connection with community fees
is not material to our unaudited condensed consolidated financial statements. Revenue for basic housing and support services and additional
requested services is recognized in accordance with ASC Topic 606 and measured based on the consideration specified in the resident agreement
and is recorded when the services are provided.
Core
Business – Continuing Operations
Resident
Care Contracts. Resident fees at the Company’s senior living communities and adult daycare may consist of regular monthly charges
for basic housing and support services and fees for additional requested services and ancillary services. Fees are specified in the Company’s
agreements with residents, which are generally short term (30 days to one year), with regular monthly charges billed the first of the
month. Funds received from resident in advance of services are not material to the Company’s unaudited condensed consolidated financial
statements.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
Cost
of Product Revenue
Cost
of product revenue represents direct and indirect costs incurred to bring the product to saleable condition.
Research
and Development Expenses
All
research and development costs are charged to expense as incurred. Research and development expenses primarily include (i) payroll and
related costs associated with research and development performed, (ii) costs related to clinical and preclinical testing of the Company’s
technologies under development, and (iii) other research and development costs including allocations of facility costs.
PPP
Loans
The
Company recognizes PPP loans under the Small Business Administration as debt instruments in accordance with ASC 470, “Debt.”
When the loan proceeds are received, a long-term liability account (i.e., “PPP Loan Liability”) is set up. The presentation
of the loan in the balance sheet is accounted for in accordance with GAAP regarding the presentation of assets and liabilities, whereas
the portion of the loan due within 12 months from year end will be considered a current liability and the remaining portion will be considered
a long-term liability. Also, under this guidance, a borrower should not recognize any income from the extinguishment of its debt until
the borrower has been legally released as the primary obligor under the loan. In addition, the forgiveness of PPP loans as income will
be recorded as other income and not included in income from operations based on the unprecedented nature of COVID-19.
ERTC
Funds
The
Company was eligible to claim the employee retention tax credit (“ERTC”) for certain employees under the CARES Act. The
2021 refundable tax credit is available to employers that fully (or partially) suspend operations during any calendar quarter in
2021 due to orders from an appropriate governmental authority, which limits commerce, travel, or group meetings due to COVID-19. The
credit is equal to 70% of qualified wages paid after March 12, 2020 through December 31, 2020 to qualified employees, with a maximum
credit of $7,000
per employee. The credit was modified and extended for wages paid from January 1, 2021, through December 31, 2021, by the
“Consolidated Appropriations Act, 2021”. Certain of these credits are obtained by refunds of employer taxes that have
been paid, and other amounts were obtained by reducing the amount of withholdings remitted to the Internal Revenue Service. The ERTC was
terminated as of fourth quarter of 2021.
General
and Administrative Expenses
General
and administrative expenses represent personnel costs for employees involved in general corporate functions, including finance, accounting,
legal and human resources, among others. Additional costs included in general and administrative expenses consist of professional fees
for legal (including patent costs), audit and other consulting services, travel and entertainment, charitable contributions, recruiting,
allocated facility and general information technology costs, depreciation and amortization, and other general corporate overhead expenses.
Recently
Issued Accounting Pronouncements Not Yet Adopted
In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit
Losses” (Topic 326), which requires a financial asset, or a group of financial assets measured at amortized cost basis to be presented
at the net amount expected to be collected. This ASU eliminates the probable initial recognition threshold and instead requires reflection
of an entity’s current estimate of all expected credit losses. In addition, this ASU amends the current available for sale security
other-than-temporary impairment model for debt securities. The length of time that the fair value of an available for sale debt security
has been below the amortized cost will no longer impact the determination of whether a credit loss exists and credit losses will now be
limited to the difference between a security’s amortized cost basis and its fair value. In November 2018, the FASB issued ASU No.
2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”, which amends the transition and effective
date for nonpublic entities and clarifies that receivables arising from operating leases are not in the scope of this ASU. These ASUs
are effective for reporting periods beginning after December 15, 2022. The Company is assessing the potential impact that the adoption
of these ASUs will have on its unaudited condensed consolidated financial statements.
In
December 2019, the FASB also issued ASU 2019-12, “Income Taxes (Topic
740): Simplifying the Accounting for Income Taxes”, which simplifies certain requirements under Topic 740, including eliminating
the exception to intra-period tax allocation when there is a loss from continuing operations and income from other sources, such as other
comprehensive income or discontinued operations. The amendments in this ASU are effective for the fiscal year beginning after December
15, 2020. The Company adopted the ASU effective January 1, 2021 and has determined that this ASU does not have a material impact on its
unaudited condensed consolidated financial statements.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
| 3. |
Real Estate, Property and Equipment,
Net |
Property
and equipment, net, consists of the following:
Memory
Care Facilities and Corporate
Schedule
of Real Estate, Property and Equipment
| | |
Estimated Useful
Lives | | |
September
30, 2022 | | |
December
31, 2021 | |
| | |
| | |
| | |
| |
| Land | |
| | | |
$ | 1,255,477 | | |
$ | 1,255,477 | |
| Building
and building improvements | |
| 39
years | | |
| 4,508,797 | | |
| 4,508,797 | |
| Furniture,
fixtures, and equipment | |
| 3-7
years | | |
| 7,395,070 | | |
| 5,127,466 | |
| Total | |
| | | |
| 13,159,344 | | |
| 10,891,740 | |
| Less
accumulated depreciation | |
| | | |
| (4,685,046 | ) | |
| (3,472,904 | ) |
| Real
estate, property and equipment, net | |
| | | |
$ | 8,474,298 | | |
$ | 7,418,836 | |
Non-core
businesses classified as assets held for sale:
| | |
Estimated Useful
Lives | | |
September
30, 2022 | | |
December
31, 2021 | |
| Land | |
| | | |
$ | 1,007,735 | | |
$ | 1,688,070 | |
| Building
and building improvements | |
| 39
years | | |
| 466,447 | | |
| 466,447 | |
| Total | |
| | | |
| 1,474,182 | | |
| 2,154,517 | |
| Less:
accumulated depreciation | |
| | | |
| (68,272 | ) | |
| (68,272 | ) |
| Real
estate, property and equipment, net | |
| | | |
$ | 1,405,910 | | |
$ | 2,086,245 | |
The
Company recorded depreciation expense relating to real estate, property, and equipment for the Company’s memory care facilities
and corporate assets in the amount of $178,654 and $550,913 for the three and nine months ended September 30, 2022 respectively while depreciation
for three and nine months ended September 30, 2021 was $129,074 and $433,198, respectively.
The
Company has reviewed the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. If there is an indication that the value of an asset is not recoverable, the
Company determines the amount of impairment loss, if any, by comparing the historical carrying value of the asset to its estimated fair
value. The Company determined estimated fair value based on input from market participants, the Company’s experience selling similar
assets, market conditions and internally developed cash flow models that the Company’s assets or asset groups are expected to generate,
and the Company considers these estimates to be a Level 3 fair value measurement.
Based
on the Company’s review of carrying value of long-lived assets included in discontinued operations, the Company concluded that
a)several of its properties were sold and did not warrant consideration; b) certain properties belonging to their continuing operations
segment generate revenue, are cash flow positive and have assets with low carrying values as compared to the recoverable amounts and
therefore do not meet impairment requirements; and that c) several properties might be impaired due to extended closures. Both the SeaWorld
and Buda hotels have experienced extended closures since March, 2020 due to the COVID-19 pandemic and this has meant significant reductions
in cash flows and on the ability to repay the mortgage loans on the properties.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
The
Company follows ASC 842, as discussed in Note 1 – Summary of Significant Accounting Policies, the Company has elected the package
of practical expedients offered in the transition guidance which allows management not to reassess the lease identification, lease classification,
and initial direct costs. The Company has elected the accounting policy practical expedient to exclude recording short term leases for
all asset classes, as right-of-use assets, and lease liabilities on the unaudited condensed consolidated balance sheet. Finally, the
Company has elected to recognize lease components and non-lease components separately for real estate leases.
Leases
for Memory Care Facilities
The
Company leases three memory care facilities from MHI-MC San Antonio, LP, MHI-MC Little Rock, LP, and MHI-MC New Braunfels, LP (collectively
“MHI entities”) under three separate lease agreements and originally recorded a right of use asset and a lease liability
of $35,782,153. The amended leases contain three options to renew, which were not considered reasonably certain of being exercised as
of the lease commencement date nor the balance sheet date.
The
Company leased the memory care Simpsonville Facility from MC-Simpsonville, SC-1-UT, LLC (the “Simpsonville Landlord”)
under a 15-year non-cancelable lease agreement. Beginning January 2019, the Company ceased paying the Simpsonville Landlord rent.
The Landlord had filed two lawsuits against the guarantors of the lease including a subsidiary of Clearday. During the third quarter
of 2022, the Company and the Simpsonville Landlord terminated this lease and agreed to settle one of two actions for these
litigations. See Note 7 – Commitments and Contingencies for additional information. The ROU liability was removed from the
balance sheet since the lease was terminated on August 5, 2022.
All
leases are classified as operating leases. The Company does not have any leases within its non-core business. Therefore, no right-of-use
assets or lease liabilities were recorded within non-current assets held for sale or lease liability on the unaudited condensed consolidated
balance sheet following the adoption of ASC 842. Weighted-average remaining lease terms and discount rate as of September 30, 2022, are
13.0 years and 8.25%, respectively.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
Lease
Costs
For
the three and nine months ended September 30, 2022 and 2021, the lease costs recorded in the wages and operating expenses of the
unaudited condensed consolidated statement of operations are as follows:
Schedule
of Lease Cost
| | |
2022 | | |
2021 | |
| | |
For the Three Months Ended
September 30, | |
| | |
2022 | | |
2021 | |
| Lease
costs: | |
| | | |
| | |
| Operating
lease costs | |
$ | 985,103 | | |
$ | 1,243,519 | |
| Short-term
lease costs | |
| 5,503 | | |
| 7,829 | |
| Total
lease costs | |
$ | 990,606 | | |
$ | 1,251,348 | |
| | |
| | | |
| | |
| | |
2022 | | |
2021 | |
| | |
For the Nine Months Ended
September 30, | |
| | |
2022 | | |
2021 | |
| Lease
costs: | |
| | | |
| | |
| Operating
lease costs | |
$ | 3,278,856 | | |
$ | 3,730,559 | |
| Short-term
lease costs | |
| 24,957 | | |
$ | 33,751 | |
| Total
lease costs | |
$ | 3,303,813 | | |
$ | 3,764,310 | |
Operating
Lease Payments
The
following table summarizes the maturity of the Company’s operating lease liabilities as of September 30, 2022:
Schedule
of Maturities of Operating Lease Liabilities
| Year
Ending | |
Operating
Leases | |
| 2022
(Remaining of 2022) | |
$ | 709,172 | |
| 2023 | |
| 2,907,605 | |
| 2024 | |
| 2,980,295 | |
| 2025 | |
| 3,054,802 | |
| 2026 | |
| 3,131,172 | |
| 2027 | |
| 3,209,452 | |
| Thereafter | |
| 32,746,806 | |
| Total
minimum lease payments | |
$ | 48,739,306 | |
| Less:
amounts representing interest | |
| 21,078,812 | |
| Present
value of future minimum lease payments | |
| 27,660,494 | |
| Less:
current portion | |
| 2,889,874 | |
| Non-current
lease liabilities | |
$ | 24,770,618 | |
| 5. |
Discontinued Operations |
The
Company held two hotel properties during 2021, each of which were classified as non-core assets and were sold or disposed of during 2021.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
During
the quarter ended September 30, 2022, the Company sold one non-core asset
On
April 5, 2022, Leander Associates, Ltd., a Texas limited partnership (“Leander Seller”) also executed a Purchase and Sale
Agreement with Leander Ridge, LLC, a Texas limited liability company (“Buyer”) to sell one of Clearday’s non-core assets:
a land parcel located in Leander, Texas (the “Leander Property”) for a consideration of $392,040 per acre ($9.00/sf) of developable
land, for an approximate total amount of $1,842,588 (the “Purchase Price”). The Sale Agreement provides a 90-day period following
the April 4, 2022 effective date, or until July 5, 2022 (the “Feasibility Period”), for the purchaser to inspect the Leander
Property and conduct their analysis, appraisals and other examination of the Leander Property, including environmental inspections. On
June 29, 2022, the Leander Seller sold a 6% tenant in common interest in the Leander Property for approximately $43,000. Such purchaser
will share in the net proceeds in the sale of the Leander Property on a pro rata basis.
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, 2022 | | |
December
31, 2021 | |
| | |
| | |
| |
| ASSETS | |
| | | |
| | |
| Current
assets: | |
| | | |
| | |
| Cash
and cash equivalents | |
$ | - | | |
$ | - | |
| Restricted
cash | |
| - | | |
| - | |
| Accounts
receivable | |
| - | | |
| - | |
| Prepaid
expenses | |
| - | | |
| - | |
| Total
current assets | |
| - | | |
| - | |
| | |
| | | |
| | |
| Investments
in non-consolidated entities | |
| - | | |
| - | |
| Note
receivables | |
| - | | |
| - | |
| Real
estate, property and equipment, net | |
| 1,405,910 | | |
| 2,086,245 | |
| Total
long-term assets held for sale | |
| 1,405,910 | | |
| 2,086,245 | |
| TOTAL
ASSETS | |
$ | 1,405,910 | | |
$ | 2,086,245 | |
| LIABILITIES | |
| | | |
| | |
| Current
liabilities: | |
| | | |
| | |
| Accounts
payable | |
| - | | |
| - | |
| Accrued
expenses | |
| 460,691 | | |
| 438,192 | |
| Accrued
interest | |
| - | | |
| - | |
| Current
portion of long-term debt | |
| 805,000 | | |
| 1,000,000 | |
| Total
current liabilities | |
| 1,265,691 | | |
| 1,438,192 | |
| | |
| | | |
| | |
| Long-term
liabilities: | |
| | | |
| | |
| Note
payable | |
| 696,470 | | |
| 487,678 | |
| Long-term
debt, less current portion | |
| 218,617 | | |
| 225,169 | |
| Total
long-term liabilities held for sale | |
| 915,087 | | |
| 712,847 | |
| TOTAL
LIABILITIES | |
$ | 2,180,778 | | |
$ | 2,151,039 | |
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
| | |
2022 | | |
2021 | |
| | |
Nine
Months Ended September 30, | |
| | |
2022 | | |
2021 | |
| REVENUES | |
| | | |
| | |
| Commercial
property rental revenue | |
$ | 64,479 | | |
$ | 63,853 | |
| Total
revenues, net | |
| 64,479 | | |
| 63,853 | |
| | |
| | | |
| | |
| Costs
and expenses | |
| | | |
| | |
| Operating
expenses | |
| 46,323 | | |
| 93,689 | |
| General
and administrative expenses | |
| 66,717 | | |
| 751,105 | |
| Total
operating expenses | |
| 113,041 | | |
| 844,794 | |
| | |
| | | |
| | |
| Loss
from operations | |
| (48,561 | ) | |
| (780,941 | ) |
| | |
| | | |
| | |
| Other/(income)
expenses | |
| | | |
| | |
| Interest
expense | |
| 151,235 | | |
| 190,010 | |
| Gain
on disposal of assets | |
| | | |
| 15,000 | |
| Equity
income from investees, net of applicable taxes | |
| | | |
| - | |
| Impairment
expense (recovery) | |
| | | |
| (811,061 | ) |
| Other
(income) expenses | |
| (611,319 | ) | |
| (305,301 | ) |
| Total
(income)/expense | |
| (460,085 | ) | |
| (911,352 | ) |
| | |
| | | |
| | |
| Net
loss (income) | |
$ | (411,523 | ) | |
$ | 130,411 | |
As
of September 30, 2022 and December 31, 2021, the current portion of long-term debt within the Company’s unaudited condensed financial
statements for our core MCA and Corporate facilities is $9,515,992 and $3,941,782 respectively.
As
of September 30, 2022 and December 31, 2021 the long term debt less the current portion of the company debt is $1,091,108 and $5,572,427.
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 $1,030,979 and $1,927,622
for the three and nine months ended September 30, 2022 respectively compared to $30,951 and $304,350 respectively for the three and nine
months ended September 30,2021. The Company had $582,503 and $411,523 income respectively, for discontinued operations respectively for
the three and nine months ended September 30, 2022 and $501,832 loss and $130,411 income for discontinued operations for the same periods
in 2021.
The
change in the interest expense reflects primarily the impact of the merchant cash loans we have taken out which carry a higher interest rate.
Schedule
of Long Term Debt
| As
of September 30, | |
| Continuing
Core
| | |
| Discontinued
Non-Core | | |
| Total
| |
| 2022 | |
$ | 3,873,324
| | |
$ |
| | |
$ | 3,873,324
| |
| 2023 | |
| 7,773,957
| | |
| 1,080,000
| | |
| 8,853,957
| |
| 2024 | |
| -
| | |
| -
| | |
| -
| |
| 2025 | |
| 596,208
| | |
| 421,470
| | |
| 1,017,678
| |
| Thereafter | |
| 494,900
| | |
| 218,617
| | |
| 713,517
| |
| Total
obligations | |
$ |
12,738,389 | | |
$ | 1,720,087
| | |
$ | 14,458,476 | |
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
The
following table summarizes the maturity of the Company’s long-term debt and notes payable as of September 30, 2021:
Schedule
of Long Term Debt and Notes Payables
| |
Maturity
Date | | |
Interest
Rate | | |
September
30, 2022 | | |
December
31, 2021 | |
| Memory
Care (Core) Facilities: | |
| | | |
| | | |
| | | |
| | |
| Naples
Equity Loan | |
| May
2023 | | |
| 9.95 | % | |
$ | 4,550,000 | | |
$ | 4,550,000
| |
| Libertas
Financing Agreement | |
| May
2022 | | |
| 0.00 | % | |
| - | | |
| 283,685
| |
| New
Braunfels Samson Funding 1 | |
| April
2022 | | |
| 0.00 | % | |
| - | | |
| 80,467
| |
| New
Braunfels Samson Group 2 | |
| April
2022 | | |
| 0.00 | % | |
| - | | |
| 80,467
| |
| Naples
Operating LG Funding | |
| April
2022 | | |
| 0.00 | % | |
| - | | |
| 92,519
| |
| Naples
LLC CFG Merchant Solutions | |
| September
2022 | | |
| 0.00 | % | |
| -
| | |
| 134,239
| |
| MCA
Invesque Loan | |
| January
2024 | | |
| 8.50 | % | |
| -
| | |
| 57,452
| |
| New
Braunfels Business Loan | |
| March
2022 | | |
| 6.25 | % | |
| -
| | |
| 64,072
| |
| Gearhart
Loan | |
| December
2022 | | |
| 7.00 | % | |
| 193,578
| | |
| 213,578
| |
| SBA
PPP Loans | |
| February
2023 | | |
| 1.00 | % | |
| 1,518,682
| | |
| 2,510,998
| |
| Buda
2K Hospitality LLC | |
| October
2022 | | |
| 15.00 | % | |
| -
| | |
| 100,000
| |
| Equity
Secure Fund I, LLC | |
| June
2022 | | |
| 11.50 | % | |
| 1,000,000
| | |
| 1,000,000 | |
| Bank
Direct Payable | |
| December
2022 | | |
| 3.13 | % | |
| 191,468 | | |
| - | |
| Naples
Operating PIRS Capital | |
| March
2023 | | |
| 0.00 | % | |
| 338,000 | | |
| - | |
| Little
Rock Libertas | |
| February
2023 | | |
| 0.00 | % | |
| 326,330 | | |
| - | |
| PIRS
Capital Financing Agreement | |
| March
2023 | | |
| 0.00 | % | |
| 144,659 | | |
| - | |
| Little
Rock Samson Funding #3 | |
| May
2023 | | |
| 0.00 | % | |
| - | | |
| - | |
| Naples
Samson #1 | |
| May
2023 | | |
| 0.00 | % | |
| 76,916 | | |
| - | |
| Westover
Samson #1 | |
| April
2023 | | |
| 0.00 | % | |
| - | | |
| - | |
| Naples
LG Funding #2 | |
| April
2023 | | |
| 0.00 | % | |
| 171,170 | | |
| - | |
| New
Braunfels Samson #1 | |
| April
2023 | | |
| 0.00 | % | |
| - | | |
| - | |
| Little
Rock Premium Funding | |
| April
2023 | | |
| 0.00 | % | |
| 211,313 | | |
| - | |
| Little
Rock KIT Funding | |
| December
2022 | | |
| 0.00 | % | |
| 89,400 | | |
| - | |
| Little
Rock Samson Funding #4 | |
| February
2023 | | |
| 0.00 | % | |
| 170,501 | | |
| - | |
| Naples
Operating SWIFT | |
| December
2022 | | |
| 0.00 | % | |
| 111,750 | | |
| | |
| New
Braunfels Samson Cloud Fund | |
| February
2023 | | |
| 0.00 | % | |
| 308,035 | | |
| - | |
| New
Braunfels Samson Group | |
| February
2023 | | |
| 0.00 | % | |
| 375,804 | | |
| - | |
| Westover
Hills One River | |
| December
2022 | | |
| 0.00 | % | |
| 128,298 | | |
| - | |
| AIU
Sixth Street | |
| February
2023 | | |
| 12.0 | % | |
| 103,320 | | |
| - | |
| Westover
Hills FOX Capitol | |
| March
2023 | | |
| 0.00 | % | |
| 109,384 | | |
| - | |
| Westover
Hills Arsenal | |
| October
2023 | | |
| 0.00 | % | |
| 95,882 | | |
| - | |
| Westover
Samson Funding | |
| March
2023 | | |
| 0.00 | % | |
| 267,754 | | |
| - | |
| Notional
amount of debt | |
| | | |
| | | |
| 10,482,243
| | |
| 9,492,477
| |
| Less:
current maturities | |
| | | |
| | | |
| 10,482,243
| | |
| 4,910,863
| |
| |
| | | |
| | | |
$ | - | | |
| $
4,581,614 | |
The indebtedness set forth above
with a zero percent interest were provided by creditors under agreements (“MCA Agreements”). During the fourth quarter
of 2022, the Company assessed its rights under the terms of these MCA Agreements and determined that it had rights and defenses to
the continued payments to the creditors. The Company has not made payments on account of these MCA Agreements and, accordingly,
these accounts are considered in default. See Note 7 – Commitments and Contingencies for additional
information.
| Non-core businesses classified as liabilities held for sale: | | |
| | |
| |
| | |
| |
| | |
| | |
| |
| Real Estate: | |
| |
| | | |
| | | |
| | |
| Artesia Note (6) | |
June 2033 | |
| Variable | | |
$ | 218,617 | | |
$ | 225,436 | |
| Tamir Note | |
March 2022 | |
| 12.00 | % | |
| - | | |
| 300,000 | |
| Leander Note | |
April 2022 | |
| | % | |
| - | | |
| 700,000 | |
| Carpenter Enterprises | |
| |
| | | |
| 275,000 | | |
| - | |
| Leander Stearns National Association | |
February 2023 | |
| 10.38 | % | |
| 805,000 | | |
| - | |
| Notional amount of debt | |
| |
| | | |
| 1,298,617 | | |
| 1,225,436 | |
| Less: current maturities | |
| |
| | | |
| 805,000 | | |
| 1,000,000
| |
| | |
| |
| | | |
$ | 493,617 | | |
$ | 225,436 | |
| Core
Businesses (Continuing Operations) Notes Payable |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | |
| Cibolo
Creek Partners promissory note | |
| December
2025 | | |
| 0.09 | % | |
$ | 96,208 | | |
$ | 66,208 | |
| EIDL
SBA Treas 310 | |
| December
2051 | | |
| 3.75 | % | |
| 494,900
| | |
| 494,900
| |
| AGP
| |
| September 2023 | | |
| 2.00 | % | |
| 550,000
| | |
| 2,522,922
| |
| Mast
Hill #1 | |
| May
2023 | | |
| 12.00 | % | |
| 600,000 | | |
| - | |
| Mast
Hill #2 | |
| July
2023 | | |
| 12.00 | % | |
| 315,000 | | |
| - | |
| Five
C’s Loan | |
| December
2022 | | |
| 9.85 | % | |
| 325,000
| | |
| 325,000
| |
| Jefferson | |
| May
2023 | | |
| 12.00 | % | |
| 117,600 | | |
| - | |
| GS
Capital | |
| May
2023 | | |
| 12.00 | % | |
| 89,862 | | |
| - | |
| Firstfire | |
| May
2023 | | |
| 12.00 | % | |
| 133,627 | | |
| - | |
| Round
Rock Development Partners Note | |
| December
2025 | | |
| 0.09 | % | |
| 500,000
| | |
| 500,000
| |
| Notional
amount of debt | |
| | | |
| | | |
| 3,222,197
| | |
| 3,909,030
| |
| Less:
current maturities | |
| | | |
| | | |
| 2,131,089 | | |
| 3,347,922 | |
| | |
| | | |
| | | |
$ | 1,091,108 | | |
$ | 561,108 | |
| Other
Current Liabilities | |
| | | |
| | | |
| | | |
| | |
| Due
to Related Parties (including accrued guarantee fees) | |
| | | |
| | | |
| 1,034,279
| | |
| 283,023
| |
|
| |
| | | |
| | | |
$ | 1,034,279 | | |
$ | 283,023 | |
| Non-Core
Businesses (Discontinued Continuing Operations) Notes Payable | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | |
| Cibolo
Creek Partners promissory note | |
| December
2025 | | |
| 0.09 | % | |
$ | 421,470 | | |
$ | 421,470 | |
| Notional
amount of debt | |
| | | |
| | | |
| 421,470
| | |
| 421,470
| |
| | |
| | | |
| | | |
| | | |
| | |
| Other
Current Liabilities | |
| | | |
| | | |
| | | |
| | |
| Guarantee
Fees | |
| | | |
| | | |
| -
| | |
| -
| |
| |
* |
On
July 7, 2022, this note was modified to reduce the principal to $550,000 and extend the maturity to September 30, 2023. |
On
the accompanying unaudited condensed consolidated balance sheet for core business operations includes $694,615 and $0 of unamortized
debt discounts as of September 30, 2022 and 2021, respectively.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
Memory
Care (Core) Facilities:
Naples
Equity Loan
On
April 29, 2021, the Company executed a secured promissory note with Benworth Capital Partners, LLC in the amount of $4,550,000. The original
Naples mortgage was paid off in the amount of $2,739,195 and there were closing costs of $354,357 which netted the Company proceeds in
the amount of $1,456,448. This secured promissory note is a two-year loan with interest only payments at a fixed interest rate of 9.95%.
This loan is guaranteed by certain officers of the Company and is secured by the Memory Care facility located at 2626 Goodlette-Frank
Road, Naples, Florida 34105.
PPP
Loans
In
May 2020, the Company was granted four separate loans, which has enabled the Company to retain the Company’s employees during the period of disruption created
by the Coronavirus pandemic. STI was granted one loan in March 2021. The PPP Loans, which are evidenced by Notes issued by the Company
(the “Note”), mature in May 2022 and bear interest at a fixed rate of 1.0% per annum, accruing from May 2020 (“Loan
Date”) and payable monthly. The Note is unsecured and guaranteed by the SBA. The Note may be prepaid by the Company at any time
prior to maturity with no prepayment penalties. The Note provides for customary defaults, including failure to make payment when due
or to fulfill the Company’s obligations under the notes or related documents, reorganizations, mergers, Consolidations or other
changes to the Company’s business structure, and certain defaults on other indebtedness, bankruptcy events, adverse changes in
financial condition or civil or criminal actions. The PPP loans may be accelerated upon the occurrence of a default. We expect that our
remaining PPP loans (including STI) will be forgiven in the upcoming months.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
AGP
Promissory Note
The
Company entered into an unsecured promissory note with A.G.P./Alliance Global Partners (“AGP”) which was the financial adviser
to AIU in connection with the merger. The $2,419,420, principal balance amount due of this note represents the unpaid fee amount then
owed to AGP for its services. Interest under this note accrues at 2% per annum. The Company was obligated to make monthly payments of
$30,000 and 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 were due on September 10, 2022. On July
7, 2022, the Company and AGP modified the obligations under this note in consideration of a payment of $175,000. The modified note reduced
the principal balance to $550,000, as of such date, provides for interest to continue to accrue at 2% per annum, extended the maturity
from September 10, 2022 to September 30, 2023 and provides that the note represents all of the obligations of the Company to AGP. The
Company may continue to prepay this note at any time without penalty or fee and will continue to pay 25% 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.
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 $193,578, which extended the maturity date until April 2017. The note is collateralized
by the debtor granting a security interest to Betty Gearhart including all assets of MCA, LLC as well as any proceeds (including insurance
proceeds) of any and all of the foregoing collateral. The maturity date of the loan was further extended in April 2017, April 2018 and
April 2020. The Second Amendment to the Amended and Restated Promissory Note (the “Second Amendment”) was executed on March
5, 2020 in the principal amount of $218,578 and has a maturity date of April 1, 2021. The scheduled maturity date of this note has been
further extended to December 31, 2022.
Equity
Secured Fund I, LLC
On
March 26, 2021, the Company executed a promissory note for $1,000,000 with Equity Secured Fund I, LLC. The loan matured on April 26,
2022 and was subject to one (1) twelve (12)-month extension option. The Company and this lender continue to extend the maturity on a
month-to-month basis. 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.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
Firstfire
On
April 5, 2022, entered into a Securities Purchase Agreement (the “Note Purchase Agreement”) to issue an unsecured
promissory note to an institutional lender. We used the proceeds of this financing to fund our operations. The Note provides for the
net funding to Clearday of $150,000
after payment of specified expenses of $3,750
and provides for an original issue discount of
$18,450,
resulting in a principal obligation of $172,200
and a one-time interest charge of 12%
on such principal amount.
The
Note provides for a one-year maturity. Monthly payments on the Note of $19,286.40 will be made by Clearday with the first payment being
on May 20, 2022, which payments are subject to a 10 day grace period. The Note is unsecured. The Note provides specified events of default
(an “Event of Default”) including failure to timely pay the monetary obligations under the Note and such breach
continues for a period of ten (10) days after written notice from the Noteholder’ a breach of covenants under the Note or the Purchase
Agreement that continues for a period of twenty (20) days after written notice by the Noteholder; breach of any representation and warranty
in the Note or Purchase Agreement; commencement of bankruptcy or similar proceedings; failure to maintain the listing of Clearday’s
common stock on at least one of the Over-the-Counter markets such as the OTCQB; the failure of Clearday to comply with the reporting
requirements of the Securities Exchange Act; Clearday’s liquidation, or a financial statement restatement by Clearday.
Jefferson
Street
On
May 16, 2022, we entered into a Securities Purchase Agreement (the “Jefferson Purchase Agreement”) to issue an unsecured
promissory note (the “Jefferson Note”) to an institutional lender. This Jefferson Note provides for the proceeds to us of
$150,000 and provides for an original issue discount of $18,000 or 12%, resulting in a principal obligation of $168,000. We paid $15,000
in placement fees in connection with the sale of the Jefferson Note. After payment of such fees and closing cost, the sale of the Jefferson
Note resulted in $135,000 in net proceeds to the us. The interest on this Jefferson Note is 12% per annum or $20,160. The Jefferson Note
provides for a one-year maturity. Monthly payments on the Jefferson Note of $18,816 will be made by Clearday with the first payment being
on July 16, 2022, which payments are subject to a 10-day grace period, or shorter if the payment date is not a business day. The Jefferson
Note is unsecured. The Jefferson Note provides specified events of default (a “Jefferson Event of Default”) including failure
to timely pay the monetary obligations under the Jefferson Note and such breach continues for a period of ten (10) days after written
notice from the Jefferson Noteholder’ a breach of covenants under the Jefferson Note or the Jefferson Purchase Agreement that continues
for a period of twenty (20) days after written notice by the Jefferson Noteholder; breach of any representation and warranty in the Jefferson
Note or Jefferson Purchase Agreement; commencement of bankruptcy or similar proceedings; failure to maintain the listing of Clearday’s
common stock on at least one of the Over-the-Counter markets such as the OTCQX; the failure of Clearday to comply with the reporting
requirements of the Securities Exchange Act; Clearday’s liquidation, or a financial statement restatement by Clearday. Upon any
Jefferson Event of Default, the obligations under the Note will accrue interest at an annual rate of 22% and, if such Jefferson Event
of Default is continuing at any time that is 180 days after the date of the Note, provide the Noteholder the right and option to convert
the obligations under the Note to shares of Clearday’s common stock. The price for any such conversion is equal to 75% (or a 25%
discount) of the average of the five (5) lowest per share daily volume-weighted average price of Clearday’s common stock over the
ten (10) consecutive trading days that are not subject to specified market disruptions immediately preceding the date of the conversion.
The conversion right of the holder of the Jefferson Note is subject to a customary limitation on beneficial ownership of 4.99% of Clearday’s
common stock. Each of the Jefferson Note and the Jefferson Purchase Agreement has other customary covenants and provisions, including
representations and warranties, payment of brokers, and indemnification, that Clearday will not sell, lease or otherwise dispose of any
significant portion of its assets outside the ordinary course of business without the consent of the holder of the Jefferson Note and
Clearday will maintain a reserve of authorized and unissued shares of common stock sufficient for full conversion of the obligations
under the Jefferson Note.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
GS
Capital
On
May 20, 2022, we entered into a Securities Purchase Agreement (the “GS Purchase Agreement”) to issue an unsecured promissory
note (the “GS Note”) to an institutional lender. This GS Note provides for the proceeds to us of $103,500 and provides for
an original issue discount of $12,300 or 12%, resulting in a principal obligation of $115,800. We paid $10,000 in placement fees in connection
with the sale of the GS Note and certain other expenses of the lender. After payment of such fees and closing cost, the sale of the GS
Note resulted in $90,000 in net proceeds to the us. The interest on this GS Note is 12% per annum or $20,160. The GS Note provides for
a one year maturity. Ten monthly payments on the GS Note of $12,969.60 will be made by Clearday with the first payment being on the date
that is 60 days after the issue date of the GS Note, which payments are subject to a 10 calendar day grace period, or shorter if the
payment date is not a business day. The GS Note is unsecured. The GS Note provides specified events of default (a “GS Event of
Default”) including failure to timely pay the monetary obligations under the GS Note, a breach of covenants under the GS Note or
the GS Purchase Agreement; breach of any representation and warranty in the GS Note or GS Purchase Agreement; commencement of bankruptcy
or similar proceedings; failure to maintain the listing of Clearday’s common stock on at least one of the Over-the-Counter markets
such as the OTCQX; the failure of Clearday to comply with the reporting requirements of the Securities Exchange Act; Clearday’s
liquidation, a financial statement restatement by Clearday, an judgment against Clearday that is not previously disclosed in our filings
with the SEC that is for more than $150,000 and remains unvacated, unbonded or unstayed for 20 days, unless otherwise permitted by the
holder of the GS Note, or cross defaults under any promissory note or similar instrument with initial principal obligations of $150,000
or more. Upon any GS Event of Default, the obligations under the GS Note will accrue interest at an annual rate of 22% and, if such GS
Event of Default is continuing for 10 calendar days (but 30 calendar days if the Event of Default occurred in the first 150 days after
the date of the GS Note), then from and after the date that is 180 days after the date of the holder of the GS Note may convert the obligations
under the GS Note to shares of Clearday’s common stock. The price for any such conversion is equal to 75% (or a 25% discount) of
the average of the five (5) lowest per share daily volume-weighted average price of Clearday’s common stock over the ten (10) consecutive
trading days that are not subject to specified market disruptions immediately preceding the date of the conversion. The conversion right
of the holder of the GS Note is subject to a customary limitation on beneficial ownership of 4.99% of Clearday’s common stock.
Each of the GS Note and the GS Purchase Agreement has other customary covenants and provisions, including representations and warranties,
payment of brokers, and indemnification, that Clearday will not sell, lease or otherwise dispose of any significant portion of its assets
outside the ordinary course of business without the consent of the GS Noteholder and Clearday will maintain a reserve of authorized and
unissued shares of common stock sufficient for full conversion of the obligations under the GS Note. The GS Note includes a most favored
nations clause providing that the conversion price and interest rate of the GS Note will be adjusted on a ratchet basis if Clearday offers
more favorable terms in any other unsecured borrowing that is $250,000 or less or that has a maturity date of one year or less such as
conversion price, interest rate (whether through a straight discount or in combination with an original issue discount) or other more
favorable term as to conversion price or interest rate to another party.
Sixth
Street
The
Note provides for the net funding to Clearday of $150,000 after payment of specified expenses of $3,750 and provides for an original
issue discount of $18,450, resulting in a principal obligation of $172,200 and a one-time interest charge of 12% on such principal amount.
We paid $15,000 in placement fees in connection with the sale of the Note. The Note is not registered and was sold as a private placement
exempt from the registration requirements of the Securities Act of 1933, as amended, under Section 4(a)(2) thereof.
The
Note provides for a one year maturity. Monthly payments on the Note of $19,286.40 will be made by Clearday with the first payment being
on July 26, 2022, which payments are subject to a 10 day grace period. The Note is unsecured. The Note provides specified events of default
(an “Event of Default”) including failure to timely pay the monetary obligations under the Note and such breach
continues for a period of ten (10) days after written notice from the Noteholder’ a breach of covenants under the Note or the Note
Purchase Agreement that continues for a period of twenty (20) days after written notice by the Noteholder; breach of any representation
and warranty in the Note or Note Purchase Agreement; commencement of bankruptcy or similar proceedings; failure to maintain the listing
of Clearday’s common stock on at least one of the Over-the-Counter markets such as the OTCQB; the failure of Clearday to comply
with the reporting requirements of the Securities Exchange Act; Clearday’s liquidation, or a financial statement restatement by
Clearday.
Upon
any Event of Default, the obligations under the Note will accrue interest at an annual rate of 22% and, if such Event of Default is continuing
at any time that is 180 days after the date of the Note, provide the Noteholder the right and option to convert the obligations under
the Note to shares of Clearday’s common stock. The price for any such conversion is equal to 75% (or a 25% discount) of the average
of the five (5) lowest per share daily volume-weighted average price of Clearday’s common stock over the ten (10) consecutive trading
days that are not subject to specified market disruptions immediately preceding the date of the conversion. The conversion right of the
Noteholder is subject to a customary limitation on beneficial ownership of 4.99% of Clearday’s common stock.
Mast
Hill Loans
On
July 5, 2022, the Company closed a loan with an institutional lender, Mast Hill Fund, L.P. (“Mast Hill”), under the terms
of a Securities Purchase Agreement dated as of July 1, 2022 and issued an unsecured promissory note in the principal amount of $600,000,
which included original issue discount of $60,000 (the “MH Note 1”) to Mast Hill. The MH Note 1 provided proceeds to us $540,000
before fees and expenses. We paid $54,000 in placement fees in connection with the sale of the MH Note 1 and $7,000 of expenses of Mast
Hill. After payment of such fees and closing cost, the sale of the MH Note 1 resulted in $479,000 in net proceeds to the us. The MH Note
1 was issued in a transaction that is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities
Act”), under Section 4(a)(2) thereof. The net proceeds were used for general working purposes.
The
obligations under the MH Note 1 incur interest equal to 12% per annum, subject to increase to the lesser of 16% per annum or the maximum
amount permitted by law upon an Event of Default, as defined by the MH Note 1. The MH Note 1’s maturity date is 380 days after
the July 5 funding date of the MH Note 1. Interest and principal are payable from and after 90 calendar days after the funding date,
subject to a five business day grace period, in equal monthly payments of $60,000 plus accrued and unpaid interest, subject to our right
to extend any or each of the first three such payments for 30 days upon payment of a fee equal to 10% of the amount due on such payment
date. We may prepay the obligations under the MH Note 1 upon notice of seven trading days without payment or penalties or fees other
than a $750 administrative fee.
We
paid Mast Hill a commitment fee (“Commitment Fee”) of our common stock (“Commitment Shares”). 66,000 of Commitment
Shares were issued and vested on the funding date of the MH Note 1. An additional 300,000 Commitment Shares vest at a rate of 30,000
shares per month.
The
MH Note 1 ranks as our senior unsecured debt. No security interests were granted to the Mast Hill. Mast Hill has certain rights that
may be exercised only upon an Event of Default. These rights include the right to exercise a warrant (a “Specified Lender Warrant”)
to purchase 900,000 shares of our common stock at a price per share of $0.50. This Specified Lender Warrant may be exercised only if
there is an Event of Default under the MH Note 1. Accordingly, no shares of common stock may be purchased under this Specified Lender
Warrant when the MH Note 1 is repaid in full, if there has not been an Event of Default. Mast Hill also has the right to convert the
obligations under the MH Note 1, from and after an Event of Default under the MH Note 1, at a price per share equal to $0.50. Each of
the exercise price of such Specified Lender Warrant and the conversion price of the MH Note 1 are subject to adjustment in the event
we issue shares of common stock or equivalents at a price per share that is lower than the then exercise or conversion price. Mast Hill
has no right to convert the MH Note 1 or exercise the Warrant unless there is an Event of Default under the MH Note 1.
We
have agreed to reserve shares of our common stock for issuance to Mast Hill upon any conversion of the MH Note 1 or exercise of the related
Specified Lender Warrant, which may be converted or exercised only after an Event of Default, equal to the product of number of shares
that would be issued upon any such conversion or exercise multiplied by 1.25.
On
September 30, 2022, the Company closed an additional loan with Mast Hill under the terms of a Securities Purchase Agreement dated as
of September 28, 2022 and issued an unsecured promissory note in the principal amount of $315,000, which included original issue discount
of $31,500 (the “MH Note 2”) to the Mast Hill. The MH Note 2 provided proceeds to us in the amount of $283,500 before fees
and expenses. We paid $28,350 in placement fees in connection with the sale of the MH Note 2 and $7,000 of expenses of the Mast Hill.
After payment of such fees and closing costs, the sale of the MH Note 2 resulted in $248,150 in net proceeds to the Company. The MH Note
2 was issued in a transaction that is exempt from the registration requirements of the Securities Act, under Section 4(a)(2) thereof.
The net proceeds were used for general working purposes.
The
obligations under the MH Note 2 incur interest equal to 12% per annum, subject to increase to the lesser of 16% per annum or the maximum
amount permitted by law upon an Event of Default as defined by the MH Note 2. The MH Note 2’s maturity date is 380 days after the
September 28 agreement date of the SPA. Interest and principal are payable from and after 90 calendar days after the funding date, subject
to a five business day grace period, in equal monthly payments of $60,000 plus accrued and unpaid interest, subject to our right to extend
any or each of the first three such payments for 30 days upon payment of a fee equal to 10% of the amount due on such payment date. We
may prepay the obligations under the MH Note 2 upon notice of seven trading days without payment or penalties or fees other than a $750
administrative fee.
We
paid the Mast Hill a commitment fee (“Commitment Fee”) of our common stock (“Commitment Shares”). 34,650 of Commitment
Shares were issued and vested on the funding date of the MH Note 2. An additional 157,000 Commitment Shares vest monthly over the term
of the MH Note 2.
The
MH Note 2 ranks as our senior unsecured debt. No security interests were granted to the Mast Hill. Mast Hill has certain rights that
may be exercised only upon an Event of Default. These rights include the right to exercise a warrant (a “Specified Lender Warrant”)
to purchase 900,000 shares of our common stock at a price per share of $0.50. This Specified Lender Warrant may be exercised only if
there is an Event of Default under the MH Note 2. Accordingly, no shares of common stock may be purchased under this Specified Lender
Warrant when the MH Note 2 is repaid in full, if there has not been an Event of Default. Mast Hill also has the right to convert the
obligations under the MH Note 2, from and after an Event of Default under the MH Note 2, at a price per share equal to $0.50. Each of
the exercise price of such Specified Lender Warrant and the conversion price of such MH Note 2 are subject to adjustment in the event
we issue shares of common stock or equivalents at a price per share that is lower than the then exercise or conversion price. Mast Hill
has no right to convert the MH Note 2 or exercise the Warrant unless there is an Event of Default under the MH Note 2.
We
have agreed to reserve shares of our common stock for issuance to Mast Hill upon any conversion of the MH Note 2 or exercise of the related
Specified Lender Warrant, which may be converted or exercised only after an Event of Default, equal to the product of number of shares
that would be issued upon any such conversion or exercise multiplied by 1.25.
Debt
Related to Assets Held for Sale
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
Artesia
Note
On
April 1, 2013, the Company executed a promissory note with FirstCapital Bank of Texas, N.A. for a principal amount of $314,500 (“Artesia
Note”). the Company executed an amendment to the Artesia Note on July 23, 2018 (“Amended Artesia Note”). The Amended
Artesia Note had a principal balance of $266,048 upon execution. The original maturity date of the note was March 1, 2018, which was
extended to June 23, 2033 in the Amended Artesia Note. The note requires equal monthly principal and interest payments through maturity
and has no prepayment penalties. The note has a variable interest rate equal to the greater of 6.0% or the Prime rate plus 1.0%. The
note is collateralized by a security interest in the property and other assets within the property and is guaranteed by certain officers
and directors of the Company. As of September 30, 2022, the interest rate for this loan is 6% (the greater of 6% or the Prime rate of
3.25% plus 1.0%).
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 property. The note had an original maturity date of October 5, 2019 and was collateralized
by a security interest in the property and other assets within the property and is guaranteed by certain officers and directors of the
Company. The Company exercised an extension option which extended the maturity of the note to October 5, 2020. The note required interest
only monthly payments with the full principal balance becoming due upon the maturity date. The note has a fixed interest rate of 12.75%.
As of October 12, 2020, the maturity of the note was extended to April 5, 2021 and was refinanced on February 10, 2022 when the Company
executed a $805,000 one-year loan on the Leander note that extends the new maturity date to February 10, 2023. The note has a fixed interest
rate of 10.75%, which also includes a $56,000 interest reserve for one year in the withholdings. The loan is expected to be paid off
at the time of the sale of this property.
Notes
Payable
The
Company has notes payable to Cibolo Creek Partners, LLC, its affiliate Round Rock Development Partners, LP. These notes have a maturity
date of December 31, 2025, and there is no interest accruing on any of these notes. Each of these lenders was a related party when the
obligations were incurred. For more information, see Note 9 - Related Party Transactions.
| 7. |
Commitments and Contingencies |
Contingencies
The
tenant, MCA Simpsonville Operating Company LLC, referred to as Tenant, of the Simpsonville Facility, and other affiliates of the Company
have a dispute with the landlord of the Simpsonville Facility, MC-Simpsonville, SC-UT, LLC, referred to as the Landlord, and its affiliates
(Embree Group of Companies: Embree Construction Group, Inc., Embree Asset Group, Inc., and Embree Capital Markets Group, Inc., referred
to collectively as Embree) under the terms of the lease. After non-payment, the Landlord instituted litigation that is captioned and
numbered MC-Simpsonville, SC-UT, LLC v. Steve Person, et. al., Cause No. 19-0651-C368 in the 368th Judicial District Court of Williamson
County, Texas. After the trial court issued a judgment on damages in the amount of $2,801,365
and appeals of this judgment this action was
settled on August 5, 2022 as reflected by an Agreed Final Judgment for an aggregate amount of $3,012,011,
including costs and expenses in favor of the plaintiff, of which $2,763,936
was settled by the release of a cash bond that
Tenant previously deposited with the Court and the remaining amount of $248,075 to be paid within six months after the entry of the judgment.
The
Landlord filed a second action against Trident and the other guarantors on April 9, 2021, for claims similar to the action described
above including relief for payment of rent past due and reimbursement of taxes from October 2020 to the time of the trial in this
action. Trident and the other guarantors intend to respond to this action. The Company is not able to determine if it will prevail
in such litigation. The Tenant entered into an agreement to transfer certain operations, including lease obligations, of the
Simpsonville Facility. On August 5, 2022, in connection with the settlement of the action described above, Tenant and Landlord
terminated the lease of the Simpsonville Facility as contemplated by such agreement to transfer of certain operations, including
lease obligations, which permitted the Landlord to sell the Simpsonville Facility to a third party and thereby limit our future
obligations. The Company and Landlord are negotiating a settlement, including the amount and payment terms. There can be no
assurance that the Company will settle this second action on terms that are acceptable or at all. A hearing has been scheduled for
December 8, 2022 to consider a proposed motion lift the stay of litigation and a trial may proceed if such motion is granted by the
court.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
Certain
subsidiaries of the Company that operated hotel assets have not paid employment related taxes such as required withholdings for Texas
State unemployment taxes and federal income tax and employee and employer contributions for FICA (Social Security and Medicare) taxes,
and federal unemployment tax for the period from December 31, 2018 to December 31, 2020. These subsidiaries have since made the appropriate
filings with the Internal Revenue Service and the Company has accrued the full estimated amount of the underpaid taxes as well as the
estimated penalties and interest. As of September 30, 2022, the amount of the estimated taxes, penalties, and interest, assuming that
there is no waiver or mitigation of the penalties, is $361,552. The Company has accrued this amount in its unaudited condensed consolidated
financial statements as of September 30, 2022.
In the fourth quarter of 2021,
certain subsidiaries of the Company did not remit payroll taxes related to the Earned Retentions Tax Credit (“ERTC”).
The ERTC program permitted an offset for such obligations and was terminated during the fourth quarter with an effective termination
date of September 30, 2021. As a result, the Company has accrued $1,116,000
in such payroll taxes. These subsidiaries have applied for certain tax credits, including ERTC and Families First Coronavirus
Response Act. The Company will use such credits that will be applied to reduce these payroll tax
liabilities.
Certain subsidiaries of the Company that operate our
residential care communities have not paid employment related taxes such as required withholdings for federal income tax and employee
and employer contributions for FICA (Social Security and Medicare) taxes, and federal and state unemployment tax from and after the payroll
period that ended September 16, 2022. These subsidiaries have since made the appropriate filings with the Internal Revenue Service and
the Company has accrued the amount of the underpayment in its unaudited condensed consolidated financial statements as of September 30,
2022 of approximately $125,000, which amount does not include any taxes, penalties, and interest.
Certain subsidiaries of the Company that operate residential
care facilities (“MCA Borrowers”) incurred certain financings through merchant credit advances. Such financings were provided
by creditors under agreements (“MCA Agreements”) that describe the transaction as the sale of future receivables by the applicable
MCA Borrower. The aggregate accrued amount of these financings is approximately $2,925,195, as summarized in Note 6 – Indebtedness.
Eight of these financing parties have commenced actions alleging, among other matters, a breach of the MCA Agreement for non-payment and
a breach of the guaranty by the applicable guarantors. These actions demand monetary damages that, in the aggregate, are approximately
$1,531,640, plus other costs, fees and certain other amounts.
These actions are
| |
1. |
Premium Merchant Funding 18, LLC v Memory Care at Good Shepherd LLC and James Walesa (a guarantor), filed in state court in Kings County, New York on August 19, 2022; |
| |
2. |
Libertas Funding LLC v. Memory Care at Good Shepherd, LLC, et. al. including James Walesa (a guarantor), filed in state court in Monroe County, New York on August 24, 2022; |
| |
3. |
Cloudfund LLC v MCA New Braunfels Operating Company LLC et. al. including James Walesa (a guarantor), filed in state court in Nassau County, New York on August 29, 2022; |
| |
4. |
Cloudfund LLC v MCA Naples Operating Company, LLC and James Walesa (a guarantor), filed in state court in Nassau County, New York on August 30, 2022; |
| |
5. |
Swift Funding Source Inc. v MCA Naples Operating Company LLC et. al. including Christin Hemmens (a guarantor), filed in state court in Ontario County, New York on August 31, 2022; |
| |
6. |
Pirs Capital, LLC v MCA Westover Hills Operating Company, LLC et. al. including James Walesa (a guarantor), filed in state court in New York County, New York on September 8, 2022; |
| |
7. |
Prosperum Capital Partners, LLC dba Arsenal Funding v MCA Westover Hills Operating Company LLC et. al. including James Walesa (a guarantor), filed in state court in Kings County, New York on September 28, 2022; |
| |
8. |
Fox Capital Group, Inc. v MCA Westover Hills Operating Company LLC et. al. including James Walesa (a guarantor), filed in state court in Bexar County, Texas on October 25, 2022. |
James Walesa is our Chief Executive Officer, and/or
Christin Hemmens, is an officer. These actions are in the pleading or discovery stage of litigation. We cannot provide any assurance that
we would prevail in any of these actions or that we would be able to settle any of these actions on favorable terms, if at all.
Indemnification
Agreements
Certain
lease and other obligations of the Company are guaranteed in whole or in part by James Walesa and/or BJ Parrish and others. The
Company has agreed to indemnify and hold each such individual harmless for all liabilities and payments on account of any such
guaranty. The lease obligations of the Company for its lease obligations for four of its five MCA facilities, including the lease of
the MCA community that is located in Simpsonville, South Carolina, referred to as the Simpsonville Facility. This is the facility
that is the subject of litigation and judgement against certain of our subsidiaries. We have been fully indemnified by James Walesa
for all obligations that the Company may incur with respect to an adverse judgement against the Company, including any
post-judgement interest. Such indemnification by James Walesa is under an agreement dated as of July 30, 2020. Under such agreement,
James Walesa receives a fee equal to 2% of the total amount payable by AIU or any of its subsidiaries which is payable in units of
shares of the Alt Care Preferred Stock 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 AIU Alt Care. In the event that Mr. Walesa is required to make any payments
under this indemnification, then the Company will issue shares of Alt Care Preferred Stock and Clearday Warrants, at $10.00 per
unit, for the amount of such payment.
Subsequently,
an amendment to the indemnification agreement above was signed on January 19, 2021 in which additional securities were pledged on behalf
of James Walesa for all obligations that Company may incur with respect to an adverse judgement and/or any post-judgement interest. In
the event that Mr. Walesa is required to make any payments under this amended indemnification agreement, then Company will issue shares
of AIU Care, AIU Warrants and AIU Common Stock at $10.00 per unit as well as the AIU Series A Preferred at $20.00 per unit, for the amount
of such payment.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
Basic
net income (loss) per common share is calculated by dividing the net income (loss) attributable to common stockholders by the weighted-average
number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net income
(loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of
common shares and potentially dilutive securities outstanding for the period. For the Company’s diluted earnings per share calculation,
the Company uses the “if-converted” method for preferred stock and convertible debt and the “treasury stock”
method for Warrants and Options.
The
following tables set forth the potentially dilutive shares that were anti-dilutive in their respective periods as the Company had net
losses in 2022 and 2021, respectively.
Schedule of Anti-dilutive Shares Computation of Earnings (Loss) Per Share
| Dilution
shares calculation | |
For
the Nine Months Ended September
30, | |
| | |
2022 | | |
2021 | |
| Series
A Convertible Preferred Stock | |
| 328,925 | | |
| 328,925 | |
| Series
F 6.75% Convertible Preferred Stock | |
| 4,797,052 | | |
| 4,745,049 | |
| Series
I 10.25% Convertible Preferred Stock | |
| 320,657 | | |
| - | |
| Limited
Partnership Units | |
| 99,038 | | |
| 99,038 | |
| Warrants | |
| 4,036,320 | | |
| 1,107,896 | |
| Stock
Options | |
| - | | |
| - | |
| Total
participating securities | |
| 9,581,992 | | |
| 6,280,908 | |
| 9. |
Related Party Transactions |
Background
The
Related Party Disclosures Topic provides disclosure requirements for related party transactions and certain common control relationships.
Accounting and reporting issues concerning certain related party transactions and relationships are addressed in other Topics.
Information
about transactions with related parties is useful in comparing an entity’s results of operations and financial position with those
of prior periods and with those of other entities. It helps users of financial statements to detect and explain possible differences.
Debt
There
are some loans in which executive management has loaned money to the Company. In addition, there are loans made by the Company itself
in which certain executives personally guarantee the debt.
Cibolo
Creek Partners, LLC (“Cibolo Creek”) and its affiliate Round Rock Development Partners, LP (“RRDP”) have from
time to time made loans to us under revolving credit notes that bear interest at the then applicable federal rate and are payable on
demand or other date that was specified by such lender. In December 2018, AIU acquired businesses affiliated with Cibolo Creek. As of
September 30, 2022, Cibolo Creek and Round Rock were owed $421,470 and $500,000 respectively by the Company.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
Guarantees
From
time-to-time certain officers and directors will personally guarantee a loan. There is a guarantee fee agreement in place that details
the amount of the fee as well as payment terms for certain executives in the Company. The amount of the fee is capped at 1% of the amount
of the outstanding note regardless of how many guarantors there are on the loan.
Other
Transactions
On
February 18, 2022, MCA Naples, LLC (‘Seller’) executed a purchase agreement with Richard Morris, an executive vice president
of the Company, and Arlene Berliner, JTWROS (the “Purchaser”) to sell undivided interests in the land and improvements (the
“Naples Property”) that are used for its Memory Care of Naples care facility that is in Naples, Florida (the “Naples
Facility”) for aggregate cash amount of $100,000. At the closing of this Purchase Agreement, the purchaser of this undivided interest
in the Naples Property will hold an undivided interest in the Naples Property as tenants in common and will be party to a Tenant in Common
Agreement (“TIC Agreement”). This individual has also made certain loans to the Company and has purchased 20 Mitra Mini robots and rents them
to us for a monthly fee that has been deferred, and has granted us the right to purchase these robots.
Related
parties of the Company, including our Chief Executive Officer, have from time to time made as unsecured non-interest bearing advances
that are due upon demand. As of September 30, 2022, the balance of such advances from officers were an aggregate amount of approximately
$1,034,000 due to our Chief Executive Officer and his related party.
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.
Liquidation
Preference
In
the event of the Company’s liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in
the net assets legally available for distribution to stockholders after the payment of all of the Company’s debts and other liabilities
and the satisfaction of any liquidation preferences that may be granted to the holders of any then outstanding shares of preferred stock.
Preferred
Stock
Prior
to the AIU Merger, AIU had Series A 6.75% cumulative convertible preferred stock, $0.01 par value, 4,797,052 shares of such securities
were issued and outstanding as of December 31, 2021. Each share of Series A preferred stock has a stated value equal to the Series A
original issue price. The conversion rate to the number of shares of AIU common stock is equal to 1 share for each share of Series A
preferred stock. In connection with the securities, they were either converted into AIU common stock and then exchanged for the Company
Common Stock or exchanged for shares of the Company’s Series F 6.75% cumulative convertible preferred stock, $0.001 par value.
The Company has 5,000,000 shares authorized with 4,797,052 and 4,797,052 issued and outstanding as of September 30, 2022 and December
31, 2021, respectively. The Series F Preferred Stock has a stated value of $20.00 per share is exchangeable at the option of the holder
into approximately 2.38 shares of the Company’s Common Stock, subject to adjustment for specified fundamental transactions such
as stock splits, reverse stock splits and stock combinations. See Note 11 - Preferred Stock – Temporary, for accounting treatment
of the Series F Preferred Stock.
The
Series A Preferred Stock of the Company that was issued and outstanding prior to the merger remains issued and outstanding. Such
preferred stock has a $.001
par value, 2,000,000
shares authorized, and 328,925
shares issued and outstanding as of September 30, 2022 and December 31, 2021. 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.
Clearday,
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
Dividends
and Distributions
For
the three and nine months ended September 30, 2022, the Company recognized dividends for the 6.75% Series F
preferred stock in the amount of $1,666,980
and $4,941,921,
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 AIU Merger Effective Date.
The
following is a summary of such outstanding warrants at September 30, 2022:
Summary of Outstanding Warrants
| | |
Total | | |
Currently
Exercisable | | |
Exercise
Price per Share | | |
Expiration
Date |
| | |
Common
Shares | | |
|
| | |
Total | | |
Currently
Exercisable | | |
Exercise
Price per Share | | |
Expiration
Date |
| | |
| | |
| | |
| | |
|
| 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
issued by AIU for a consultant | |
| 500,000 | | |
| 500,000 | | |
$ | 11.00 | | |
August
10, 2026 |
In
addition, the Company issued warrants (“Specified Lender Warrants”) to Mast Hill to purchase 1,372,500
shares of our common stock at the exercise price
equal to $0.50
per share, subject to adjustment on a “full
ratchet” basis for any issuance of our common stock at a price per share that is less than the then exercise price. However, the
Specified Lender Warrants were issued, effectively, as an additional remedy for the benefit of Mast Hill upon an event of default under
the MH Note 1 and MH Note 2 described in Note 6. Indebtedness. None of the Specified Lender Warrants may be exercised until there is
an event of default under such promissory notes issued to Mast Hill. The Specified Lender Warrants have and exercise period of 5 years
after the date of any such event of default.
Warrants
that were issued by AIU have been assumed by Clearday in the merger.
As
of September 30, 2022, 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
Prior
to the closing of the merger, AIU issued to a consultant that is subject to a 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. See note 6 about Mast Hill LP for contingent warrants issued.
Stock
Options
As
of September 30, 2022, there are no outstanding options under the Stock Option Plan.
Restricted
Stock
For
the nine months ended September 30, 2022, 280,000 shares of restricted common stock were issued to two professional service firms for
investor relations work.
Equity
of Subsidiary
Non-Controlling
Interest
In
November 2019, a certificate of incorporation was entered into by AIU Alt Care for Series I 10.25% cumulative convertible preferred stock,
par value $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 Months ended September 30, 2022 and 2021, $0 and $257,000 was invested in AIU Alt Care, respectively in
exchange for 0 and 25,700 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 Months ended September 30, 2022 and 2021, $0 and $413,062 was invested in Clearday Oz Fund, respectively,
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.
Non-Controlling
Interest Loss Allocation
The
Company applied ASC 810-10 guidance to correctly allocate the percentage of loss attributable to the NCI of each company. Based on 99% ownership interest, AIU
Alt Care and Clearday OZ fund incurred a loss attributable to the NCI in the amount of $132,482 and $350,894, respectively in 2022 and
incurred gains of $283,974 and $885,042, respectively, for 2021.
Cumulative
Convertible Preferred Stock and Limited Partnership Interests in Subsidiaries (NCI)
For
the nine months ended September 30, 2022, AIU Alt Care closed subscriptions and issued and sold 0 shares of Series I Cumulative Convertible
Preferred Stock (the “Alt Care Preferred Stock”), par value $0.01 per share, and 0 units of limited partnership interests
in Clearday OZ Fund. However, the dividends on the series I shares for the quarter ended September 30, 2022 totaled $409,692.
The
terms and conditions of the Alt Care Preferred Stock and the limited partnership interests in the Clearday OZ Fund allow the investors
in such interests to exchange such securities into the Company’s common stock at the then Company common stock price. For the nine
months ended September 30, 2022, AIU Alt Care and Clearday OZ fund has issued 0 and 0 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
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.
| 11. |
Preferred Stock – Temporary
equity |
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 4,797,052 shares outstanding as of September 30,2022. Pursuant to the Certificate of Designations of Series F Preferred Stock,
upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation (“Liquidation Event”), including
any Deemed Liquidation Event, as defined in the Certificate of Designations and unless otherwise determined by the majority of the holders
of the Series F Preferred Stock that a transaction is not a Deemed Liquidation Event, the holders of the then outstanding Series F Preferred
Stock shall be entitled to be paid a liquidation preference (“Preference Amount”) out of the assets of the Company available
for distribution to its stockholders equal to the original issue price and, plus any accumulated and unpaid dividends. As the payment
of this Preference Amount is not solely within the control of the Company, the Series F Preferred Stock does not qualify as permanent
equity and has been classified as temporary equity. The Series F Preferred Stock is not redeemable, and it was not probable that there
would be a Liquidation Event as of September 30,2022. Therefore, the Company is not currently required to accrete the Series F Preferred
Stock to the aggregate liquidation value.
The
Company did not recognize a benefit or provision for income taxes for the nine months ended September 30, 2022 and September 30, 2021.
The
Company evaluates its deferred tax assets on a quarterly basis to determine if a valuation allowance is required based on whether it
is more likely than not that some portion of the deferred tax asset would not be realized. The Company has assessed its position and
decided that a valuation allowance as of September 30, 2022 and September 30, 2021 is not necessary at this time.
Schedule of Tax Provision
| | |
2022 | | |
2021 | |
| | |
For
the Nine Months Ended September 30, | |
| | |
2022 | | |
2021 | |
| Current
tax provision (benefit): | |
| | | |
| | |
| Federal | |
$ | - | | |
$ | - | |
| State | |
| - | | |
| - | |
| Total
current tax benefit | |
| - | | |
| - | |
| Less
Valuation Allowance | |
| - | ) | |
| - | |
| Total | |
| 0 | | |
| 0 | |
We
evaluated subsequent events and transactions occurring after September 30, 2022 through the date of this Report.
Issuance of Shares.
We
issued 54,345
shares of common stock for compensation for financial
services performed.
Real
Estate Loan
We
received a payment from a private investor of $500,000
as an assignment of net proceeds under an agreement for the sale of property located in Leander, Texas, which
much be repaid with additional amounts on or prior to October 15, 2023. Such additional amount is computed at prime rate plus 11%
until April 15, 2023 and the prime rate plus 14% until October 15, 2023. Quarterly amounts of the prime rate will be paid or until
the Leander property is sold and the additional amount will be accrued until and paid on such property sale date. We may prepay and
terminate this agreement upon payment in full of all accrued and unpaid amounts. The foregoing descriptions of our obligations under
this agreement for an assignment of net proceeds are not complete and are qualified in their entirety by reference to the full text
of each such document, which is filed as Exhibit 10.1 to this Report and are incorporated herein by reference.