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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2023

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission File Number 0-21074

 

CLEARDAY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   77-0158076

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

8800 Village Drive, Suite 106, San Antonio, Texas 78217

(Address of principal executive offices & zip code)

 

(210) 451-0839

(Registrant’s telephone number including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
       
Non-accelerated filer Smaller reporting company
       
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ or No

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.001   CLRD   OTCQX

 

We had 25,997,628 shares of our common stock outstanding as of the close of business on July 14, 2023.

 

 

 

 
 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995 for these forward-looking statements. Our forward-looking statements relate to future events or our future performance and include, but are not limited to, statements concerning our business strategy, future commercial revenues, market growth, capital requirements, new product introductions, expansion plans and the adequacy of our funding. Other statements contained in this Report that are not historical facts are also forward-looking statements. We have tried, wherever possible, to identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and other comparable terminology.

 

We caution investors that any forward-looking statements presented in this Report, or that we may make orally or in writing from time to time, are based on the beliefs of, assumptions made by, and information currently available to, us. Such statements are based on assumptions and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations, and those differences may be material. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.

 

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include the following:

 

  Our limited cash and a history of losses;
     
  Our ability to finance our innovative care products and services, including our Longevity-tech platform and products and services that are in development;
     
  The impact of any financing activity on the level of our stock price;
     
  The impact of any default by us of certain indebtedness and the exercise by the lenders of their respective remedies including the right to convert stock and exercise warrants at a price that is a discount to our trading price;
     
  The additional dilutive impact of any issuances of securities to raise capital, including any capital in anticipation and in advance of the previously reported merger (the “Viveon Merger”) of us with Viveon Health Acquisition Corp.;
     
  The timing and amount of financing acquired in connection with the Viveon Merger;
     
  The cost and uncertainty from compliance with environmental regulations and the regulations related to operating our memory care facilities and adult day care centers;
     
  The effect of pandemics and other public health related issues on our businesses, including actions or additional regulations by State and Federal governments;
     
  Local, regional, national and international economic conditions and events, and the impact they may have on us and our customers;
     
  The impact of inflation to our businesses, including increases in our labor costs and other costs we pay for goods and services;
     
  The impact of a shortage of workers in our industries and our ability to maintain costs while properly staffing our facilities;
     
  The availability of state funds through civil money penalty grant programs;
     
  Increases in tort and insurance liability costs;
     
  Delays or nonpayment to us, including payments related to government or agency reimbursements;
     
  Our ability to pay our liabilities, including tax obligations; and
     
  Circumstances that adversely affect the ability of older adults or their families to pay for our services, such as economic downturns, weakening investment returns, higher levels of unemployment among our residents or potential residents’ family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics.

 

For further discussion of these and other factors see “Risk Factors” in our Annual Report on Form 10-K, as amended and supplemented.

 

This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report.

 

I
 

 

Clearday, Inc.

March 31, 2023

FORM 10-Q

Table of Contents

 

    Page
PART I Financial Information
Item 1. Condensed Consolidated Financial Statements
  Condensed Consolidated Balance Sheets – March 31, 2023 and December 31, 2022 (Unaudited) 1
  Condensed Consolidated Statements of Operations – For The Three Months Ended March 31, 2023 and 2022 (Unaudited) 2
  Condensed Consolidated Statements of Temporary Equity, Convertible Preferred Stock and Deficit – Three Months Ended March 31, 2023 and 2022 (Unaudited) 3
  Condensed Consolidated Statements of Cash Flows – For The Three Months Ended March 31, 2023 and 2022 (Unaudited) 5
  Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
Item 3 Quantitative and Qualitative Disclosures About Market Risk 35
Item 4 Evaluation of Disclosure Controls and Procedures. 35
PART II Other Information
Item 1. Legal Proceedings 35
Item 1A. Risk Factors 35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Mine Safety Disclosures 36
Item 5. Other Information 36
Item 6. Exhibits 36

 

References in this Report to the “Clearday”, “Company”, “we”, “us” include Clearday, Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context indicates otherwise.

 

The mark “Clearday” is protected under applicable intellectual property laws. Solely for convenience, trademarks of Clearday referred to in this Report may appear without the TM symbol, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and related intellectual property rights.

 

II
 

 

Clearday, Inc.

Condensed Consolidated Balance Sheets

March 31, 2023 and December 31, 2022

(Unaudited)

 

   March 31,
2023
   December 31,
2022
 
ASSETS          
Current assets:          
Cash  $81,429   $195,638 
Restricted cash   10,000    10,000 
Accounts receivable, net   58,447    47,705 
Prepaid expenses   113,666    213,289 
Other current assets   466    - 
Total current assets   264,008    466,632 
           
Non-current assets          
Operating lease right-of-use assets   -    22,792,752 
Land and buildings   5,817,999    5,872,045 
Leasehold improvements   269,984    435,899 
Furniture fixtures & equipment   1,795    76,848 
Work in progress   138,187    138,187 
Intangible assets   3,496,000    3,680,000 
Other long-term assets   264,251    288,155 
Total assets   10,252,224    33,750,518 
           
LIABILITIES, TEMPORARY EQUITY AND DEFICIT          
Current liabilities:          
Accounts payable  $3,599,141   $6,324,002 
Accrued expenses   5,966,110    8,415,609 
Derivative liabilities   3,748,918    2,320,547 
Accrued interest   471,684    294,370 
Due to related parties   708,366    672,597 
Deferred revenue   13,466    901,235 
Current portion long-term debt   16,746,935    16,347,290 
Note payable   -    - 
Operating lease liabilities   -    2,907,605 
Other current liabilities   1,096,012    1,140,106 
Total current liabilities   32,350,632    39,323,361 
           
Long-term liabilities:          
Operating lease liabilities   -    24,415,791 
Long-term debt, less current portion, net   4,624,723    1,392,940 
Total liabilities  $36,975,355   $65,132,092 
           
Temporary equity          
Series F 6.75% Convertible Preferred Stock, $.001 par value, 5,000,000 share authorized, 4,791,401 and 4,797,052 issued and outstanding on March 31, 2023 and December 31, 2022, respectively. Liquidation value $102,380,677 and $101,162,577 on March 31, 2023 and December 31, 2022, respectively.   22,033,843    20,448,079 
           
Deficit:          
Preferred Stock, $0.001 par value, 10,000,000 shares authorized Series A Convertible Preferred Stock, $0.001 par value, 2,000,000 shares authorized, 328,925 and 328,925 shares issued and outstanding, as of March 31, 2023 and December 31, 2022, respectively. Liquidation value of $329 and $329 on March 31, 2023 and December 31, 2022, respectively   329    329 
Common Stock, $0.001 par value, 25,194,402 and 20,805,448 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively   25,194    20,805 
Additional paid-in-capital   19,193,946    16,098,182 
Accumulated deficit   (79,011,020)   (79,671,065)
Clearday, Inc. Stockholders’ deficit:   (59,791,551)   (63,551,749)
Non-controlling interest in subsidiaries   11,034,577    11,722,096 
Total deficit  $(48,756,974)  $(51,829,653)
TOTAL LIABLITIES, TEMPORARY EQUITY AND DEFICIT  $10,252,224   $33,750,518 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

1
 

 

Clearday, Inc.

Condensed Consolidated Statements Of Operations

For The Three Months Ended March 31, 2023 and 2022

(Unaudited)

 

   2022   2022 
   Three Months Ended March 31, 
   2023   2022 
REVENUES        
Resident fee revenue, net  $2,895,326   $3,124,761 
Adult day care   89,041    83,896 
Commercial property rental revenue   22,137    1,561 
Total revenues   3,006,504    3,210,218 
OPERATING EXPENSES          
Wages & general operating expenses   3,815,150    4,634,056 
Selling, general and administrative expenses   880,485    1,393,370 
Depreciation expense   324,044    187,215 
Total operating expenses   5,019,679    6,214,641 
           
Operating loss   (2,013,175)   (3,004,423)
           
Other (income) expenses          
Interest expense   549,033    501,598 
PPP loan forgiveness   -    (642,816)
Derivative financing costs   2,567,460    - 
Fair value of derivative   (1,565,232)   - 
Loss on disposal of assets   192,407   - 
Gain on termination of lease  (4,530,644)   - 
Extinguishment of debt   

653,814

      
Other (income)/expenses   10,897   (143,889)
Total other (income)/expenses   (2,122,265)   (285,107)
           
Net income (loss) from continuing operations   109,090    (2,719,316)
Income from discontinued operations, net of tax   -    (85,227)
Net income (loss)   109,090    (2,804,543)
Net loss attributable to non-controlling interest   (550,955)   (144,265)
Preferred stock dividend   (1,698,784)   (1,619,015)
Net loss available to Clearday stockholders:   (2,140,649)  $(4,567,823)
           
Basic and diluted loss per share attributable to Clearday, Inc.          
Net loss from continued operations   (0.08)   (0.18)
Net loss/income from discontinued operations   0.00    (0.01)
Net loss   (0.18)   (0.19)
Weighted average common shares basic and diluted outstanding   24,187,743    15,010,907 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

2
 

 

Clearday, Inc.

Condensed Consolidated Statements of Temporary Equity, Convertible Preferred Stock and Deficit

Three Months Ended March 31, 2023 and 2022

(Unaudited)

 

   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit   Interest   Deficit 
   Mezzanine Equity Series F Preferred Stock   Preferred Stock Series A   Common Stock   Additional Paid- in   Accumulated   Clearday, Inc. Stockholder’s   Non-Controlling   Total 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit   Interest   Deficit 
Balance at December 31, 2021   4,797,052   $16,857,267    328,925   $329    14,914,458   $14,915   $17,069,481   $(65,208,327)  $(48,123,602)  $11,330,695   $(36,792,907)
PIK dividends accruals on Convertible Preferred Stock F        1,619,015    -    -              (1,619,015)        (1,619,015)        (1,619,015)
Series F Incentive Common Stock             -    -    2,861,334    2,859    (2,853)   -    6         6 
Accrued of series I Convertible Preferred Stock in subsidiary             -    -                             136,564    136,564 
Series I adjustment             -    -                   (669,904)   (669,904)        (669,904)
Stock Compensation for services             -    -                                  0 
Shares issued for Loan             -    -                                  0 
Dissolution of Longhorn Hospitality                                 (3,871,239)   3,871,239    -         0 
Redemption of series F shares                                                     0 
Officer Compensation and debt conversion                                                     0 
Net loss             -    -         -    -    (2,804,543)   (2,804,543)   (144,265)   (2,948,808)
Balance at March 31, 2022   4,797,052    18,476,282    328,925    329    17,775,792    17,774    11,576,374    (64,811,535)   (53,217,058)   11,322,994    (41,894,064)

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3
 

 

   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit   Interest   Deficit 
   Mezzanine Equity Series F Preferred Stock   Preferred Stock Series A   Common Stock   Additional Paid- in   Accumulated   Clearday, Inc. Stockholder’s   Non-Controlling   Total 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit   Interest   Deficit 
Balance at December 31, 2022   4,797,052   $20,448,079    328,925   $329    20,805,448   $20,805   $16,098,182   $(79,671,065)  $(63,551,749)  $11,722,096   $(51,829,653)
PIK dividends accruals on Convertible Preferred Stock F        1,698,784                        (1,698,784)        (1,698,784)        (1,698,784)
Series F Shares Converted   (5,651)   (113,020)        -    13,449    13    113,007    -    113,020         113,020 
Accrued of series I Convertible Preferred Stock in subsidiary                                                (136,564)   (136,564)
Derivative Payment discount                                 713,435         713,435         713,435 
Stock Compensation for services                                                     0 
Shares issued for Loan                       83,160    83    70,603         70,686         70,686 
Stock issued for extinguishment of liabilities                       4,218,158    4,218    3,897,578         3,901,796         3,901,796 
Net loss                                      660,045    660,045    (550,955)   109,090 
Balance at March 31, 2023   4,791,401    22,033,843    328,925    329    25,120,215    25,119    18,540,207    (79,011,020)   (59,791,552)   11,034,577    (48,756,975)

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4
 

 

Clearday, Inc.

Condensed Consolidated Statements Of Cash Flows

For The Three Months Ended March 31, 2023 and 2022

(Unaudited)

 

  

Three Months Ended March 31,

 
   2023   2022 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income (loss)  $109,090   $(2,804,543)
Loss from discontinued operations, net of tax   -    (85,227)
Loss from continued operations   109,090    (2,719,316)
Adjustments required to reconcile net income (loss) to cash flows used in operating activities          
Depreciation and amortization   324,044    187,215 
Amortization of right of use assets       459,750 
Shares issued for loan commitment   70,686    - 
Financing costs from derivative liabilities   2,567,460    - 
Gain on termination of leases   (4,530,644)   - 
Series I preferred stock accumulated dividend   (136,564)   - 
Loss (gain) on the sale of fixed assets   192,407   - 
Bad debt expense   

179,854

      
Change in fair value of the derivatives   (1,565,232)   - 
Amortization of debt issuance costs   241,504    501,970 
Amortization of discount on derivatives   

540,760

      
Loss on extinguishment of debt   

653,814

      
Gain on PPP loan forgiveness   -    (642,816)
Changes in operating assets and liabilities   -    - 
Accounts receivable   (190,596)   6,145 
Other current assets   23,438    - 
Prepaid expenses   99,623    (433,839)
Accounts payable   523,121   902,548 
Accrued expenses   -    (181,935)
Accrued liabilities   746,362    - 
Deferred revenue   (887,769)   - 
Due to related parties   35,769   - 
Other current liabilities   (44,094)   113,000 
Change in operating lease liability   -    (227,777)
Net cash used in activities of continuing operations   (1,046,967)   (2,035,055)
Net cash provided by operating activities of discontinued operations   -    (45,421)
Net cash used in operating activities   (1,046,967)   (2,080,476)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of PP&E   

(37,437

)     
Payments for property and equipment   -   (13,348)
Net cash provided by (used in) investing activities of the continuing operations   (37,437)   (13,348)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Repayment of debt   -    (977,263)
Proceeds from long-term debt   1,534,560    - 
Payment of long-term debt   

(649,121

)     
Payments on lease obligations   -    12,929,498 
Borrowings on debt, net   -    2,130,268 
Net cash provided by in financing activities   885,439    14,082,503 
Change in cash and restricted cash from continuing operations   (114,209)   (895,398)
Change in cash and restricted cash from discontinued operations   195,638    56,159 
Cash and restricted cash at beginning of the year   10,000    975,075 
Cash and restricted cash at end of year  $91,429   $135,836 
           
Reconciliation of cash and restricted cash consist of the following:          
End of period          
Cash and cash equivalents   81,429    125,836 
Restricted cash   10,000    10,000 
Total cash and restricted cash  $91,429   $135,836 
Beginning of period          
Cash and cash equivalents   195,638    965,075 
Restricted cash   10,000    10,000 
Total cash and restricted cash  $205,638   $975,075 
           
Supplemental disclosures of cash flow information          
Cash paid for interest  $649,121   $- 
Cahs paid for income taxes   -    - 
           
Supplemental disclosures of non-cash investing and financing activities:          
Early lease termination fee  $22,751,358   $- 
Settlements on derivative liability   713,435    - 
Converted Preferred Shares Series F to Commons Shares   294,140    - 
PIK dividends for Series F preferred shares   1,698,784    - 
Debt discount on derivative liability  $1,826,735   $- 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5
 

 

CLEARDAY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Description of Business and Going Concern

 

Organization, Description of Business

 

Clearday, Inc., a Delaware corporation (the “Company”), formerly known as Superconductor Technologies Inc. (“STI”), was established in 1987 and closed a merger (“AIU Merger”) with Allied Integral United, Inc., a Delaware corporation (“AIU”), on September 9, 2021. The Company continued the businesses of AIU and continued one of the businesses of STI. AIU was incorporated on December 20, 2017, and began its business on December 31, 2018 when it acquired memory care residential facilities and other businesses (the “2018 Acquisition”) that was conducted since November 2010. Since the 2018 Acquisition, the Company has been developing innovative care and wellness products and services focusing on the longevity market, including its Longevity-tech platform. In the first quarter of 2023, the Company disposed of three of its four full time memory care communities to focus on its digital care services, including robotics and its Longevity care platform.

 

Going Concern

 

As of March 31, 2023, we have an accumulated deficit of $79,011,020. During the period ended March 31, 2023, we had a net income from operations of $109,090 and net cash used in operating activities of $1,046,967 During the year ended December 31, 2022, we had a net loss from operations of $14,462,738 and cash used in operating activities of $3,978,027. The Company plans to continue to fund its losses from operations and capital funding needs through public or private equity or debt financing or other sources, including to a limited extent, 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 prospects. The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result should the Company not continue as a going concern. Management does not believe they have sufficient cash for the next twelve months from the date of this report to continue as a going concern without raising additional capital.

 

2. Summary of Significant Accounting Policies

 

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America and the interim reporting rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments (unless otherwise indicated), necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

 

Principles of Consolidation

 

The accompanying financial statements include the accounts of the Company, including its wholly owned subsidiaries. In 2019, AIU Alternative Care, Inc., a Delaware corporation (“AIU Alt Care”) and Clearday Alternative Care Oz Fund, L.P, a Delaware limited partnership (“Clearday OZ Fund”), were formed. The Company owns all of the voting interests of AIU Alt Care and the sole general partner of Clearday OZ Fund, and less than 1% of the preferred economic interests in such companies.

 

In November 2019, AIU Alt Care filed a certificate of designation that authorized preferred stock designated as the Series I 10.25% cumulative convertible preferred stock, par value $0.01 per share (the “Alt Care Preferred Stock”). The certificate of incorporation of AIU Alt Care authorizes 1,500,000 shares of preferred stock of which 700,000 is designated Alt Care Preferred Stock; and 1,500,000 of common stock. Each share of The Alt Care Preferred Stock has a stated value equal to the $10.00 Alt Care Preferred Stock original issue price. For the year ended on December 31, 2021, $897,000 was invested in AIU Alt Care in exchange for 89,700 shares of Alt Care Preferred Stock.

 

In October 2019, AIU Alt Care formed AIU Impact Management, LLC and Clearday OZ Fund were 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.

 

6
 

 

CLEARDAY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The exchange rate for each of the Alt Care Preferred Stock and the Clearday OZ LP Interests 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.

 

The Company reports its non-controlling interest in subsidiaries as a separate component of equity in the balance sheets and reports both net loss attributable to the non-controlling interest and net loss attributable to the Company’s common stockholders on the face of the statement of operations.

 

Basis of Presentation

 

The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). The accompanying financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

 

Classification of Convertible Preferred Stock

 

The Company applied ASC 480, “Distinguishing Liabilities from Equity”, and revised the consolidated financial statement presentation of its convertible preferred stock whose redemption is outside the control of the issuer. Registrants having such securities outstanding are required to present separately, in balance sheets, amounts applicable to the following three general classes of securities: (i) preferred stocks subject to mandatory redemption requirements or whose redemption is outside the control of the issuer; (ii) preferred stocks which are not redeemable or are redeemable solely at the option of the issuer; and (iii) common stocks. In addition, the rules require disclosure of redemption terms, five-year maturity data, and changes in redeemable preferred stock.

 

Use of Estimates

 

The Company’s financial statement preparation requires that management make estimates and assumptions which affect the reporting of assets and liabilities and the related disclosure of contingent assets and liabilities in order to report these financial statements in conformity with GAAP. Actual results could differ from those estimates.

 

Segment Reporting

 

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, the Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business as two operating segments, the Longevity-tech Platform and personal care.

 

Cash, and Restricted Cash

 

Cash, consisting of short-term, highly liquid investments and money market funds with original maturities of three months or less at the date of purchase, are carried at cost plus accrued interest, which approximates market value.

 

Restricted cash includes cash that the Company deposited as security for obligations arising from property taxes, property insurance and replacement reserve the Company is required to establish escrows as required by its mortgages and certain resident security deposits.

 

Accounts Receivable

 

The Company records accounts receivable at their estimated net realizable value. Additionally, the Company estimates allowances for uncollectible amounts based upon factors which include, but are not limited to, historical payment trends, write-off experience, and the age of the receivable as well as a review of specific accounts, the terms of the agreements, the residents, the payers’ financial capacity to pay and other factors which may include likelihood and cost of litigation.

 

7
 

 

CLEARDAY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to operations as incurred. Depreciation and amortization are based on the straight-line method over the estimated useful lives of the related assets. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts, and any resulting gain or loss is reflected in operations in the period realized.

 

Depreciation is computed on the straight-line method with useful lives as follows:

 

Asset Class 

Estimated

Useful Life (in

years)

 
Buildings and building improvements   39 
Leasehold improvements   15 
Equipment   7 
Computer equipment and software   5 
Furniture and fixtures   7 

 

Intangible Assets

 

Software Capitalization

 

With regards to developing software, any application costs incurred during the development state, both internal expenses and those paid to third parties are capitalized and amortized per ASC 350-40. Once the software has been developed, the costs to maintain and train others for its use will be expensed.

 

With regards to developing software, any application costs incurred during the development state, both internal expenses and those paid to third parties are capitalized and amortized based on the estimated useful life of five years.

 

Software Capitalization.

 

With regards to developing software, any application costs incurred during the development state, both internal expenses and those paid to third parties are capitalized and amortized per FASB Topic ASC350-40 (“Internal-Use Software Accounting & Capitalization”). Once the software has been developed, the costs to maintain and train others for its use will be expensed.

 

Impairment Assessment

 

The Company evaluates intangible assets and other long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This includes but is not limited to significant adverse changes in business climate, market conditions or other events that indicate an assets’ carrying amount may not be recoverable. Recoverability of these assets is measured by comparing the carrying amount of each asset to the future cash flows the asset is expected to generate. If the cash flows used in the test for recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value.

 

The Company evaluates and tests the recoverability of its goodwill for impairment at least annually during its fourth quarter of each fiscal year or more often if and when circumstances indicate that goodwill may not be recoverable.

 

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 consolidated financial statements would not differ materially from applying the guidance to each individual contract within the respective portfolio or our performance obligations within such portfolio. The five-step model defined by ASC Topic 606 requires the Company to: (i) identify its contracts with customers, (ii) identify its performance obligations under those contracts, (iii) determine the transaction prices of those contracts, (iv) allocate the transaction prices to its performance obligations in those contracts and (v) recognize revenue when each performance obligation under those contracts is satisfied. Revenue is recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services.

 

8
 

 

CLEARDAY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

A substantial portion of the Company’s revenue from its independent living and assisted living communities relates to contracts with residents for services that are generally under ASC Topic 606. The Company’s contracts with residents and other customers that are within the scope of ASC Topic 606 are generally short-term in nature. The Company has determined that services performed under those contracts are considered one performance obligation in accordance with ASC Topic 606 as such services are regarded as a series of distinct events with the same timing and pattern of transfer to the resident or customer. Revenue is recognized for those contracts when the Company’s performance obligation is satisfied by transferring control of the service provided to the resident or customer, which is generally when the services are provided over time.

 

Resident fees at our residential communities consist of regular monthly charges for basic housing and support services and fees for additional requested services, such as assisted living services, personalized health services and ancillary services. Fees are specified in our agreements with residents, which are generally short term (30 days to one year), with regular monthly charges billed in advance. Funds received from residents in advance of services provided are not material to our 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 these community fees are non-refundable and are initially recorded as deferred revenue and included in accrued expenses and other current liabilities in our 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 consolidated financial statements. Revenue for basic housing and support services and additional requested services is recognized in accordance with ASC Topic 606 and measured based on the consideration specified in the resident agreement and is recorded when the services are provided.

 

Resident Care Contracts

 

Resident fees at the Company’s senior living communities may consist of regular monthly charges for basic housing and support services and fees for additional requested services and ancillary services. Fees are specified in the Company’s agreements with residents, which are generally short term (30 days to one year), with regular monthly charges billed on the first of the month. Funds received from residents in advance of services are not material to the Company’s consolidated financial statements.

 

Below is a table that shows the breakdown by percentage of revenues related to contracts with residents versus resident fees for support or ancillary services.

  

   For the periods ended March 31, 
   2023   %   2022   % 
Revenue from contracts with customers:                    
Resident rent - over time  $2,895,326    96%  $3,124,761    97%
Day care   89,041    3%   83,896    3%
Amenities and conveniences - point in time   22,137    1%   1,561    0%
Total revenue from contracts with customers  $3,006,504    100%  $3,210,218    100%

 

Financial Instruments

 

In accordance with the reporting requirements of the FASB ASC Topic 825, “Financial Instruments”, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this standard and includes this additional information in the notes to the consolidated financial statements when the fair value is different than the carrying value of those financial instruments. The Company does not have assets or liabilities measured at fair value on a recurring basis except its derivative liability.

 

9
 

 

CLEARDAY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at the balance sheet dates, nor gains or losses reported in the statements of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held during the periods presented, except as disclosed.

 

Fair Value Measurement

 

ASC Topic 820, “Fair Value Measurements”, provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows:

 

Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange.

 

Level 2 - Pricing inputs are other than quoted prices in active markets but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using highly observable inputs.

 

Level 3 - Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value.

 

The following tables present the Company’s assets and liabilities that were measured and recognized at fair value as of March 31, 2023 and December 31, 2022:

 

March 31, 2023 
   Level 1   Level 2   Level 3   Total 
Derivative liability   -    -    3,748,918    3,748,918 

 

December 31, 2022 
   Level 1   Level 2   Level 3   Total 
Derivative liability   -    -    2,320,547    2,320,547 

 

Under the Company’s contract ordering policy, the Company first considers common shares issued and outstanding as well as reserved but unissued equity awards, such as under an equity award program. All remaining equity linked instruments such as, but not limited to, options, warrants, and debt and equity with conversion features are evaluated based on the date of issuance. If the number of shares which may be issued under the Company’s agreements exceed the authorized number of shares or are unable to be determined, equity linked instruments from that date forward are considered to be derivative liabilities until such time as the number of shares which may be issued under the Company’s agreements no longer exceed the authorized number of shares and are able to be determined.

 

The Company has outstanding note agreements containing provisions meeting the definition of a derivative liability which therefore require bifurcation. Further, pursuant to the Company’s contract ordering policy, any issuance of equity linked instruments subsequent to the initial triggering agreement will result in derivative liabilities.

 

At March 31, 2023, the Company estimated the fair value of the conversion feature derivatives embedded in the notes payable and warrants based on assumptions used in the Cox-Ross-Rubinstein binomial pricing model using the following inputs: the price of the Company’s common stock of $0.51; risk-free interest rates ranging from 3.60% to 4.94%; expected volatility of the Company’s common stock ranging from 182% to 421%; estimated exercise prices ranging from $0.35 to $0.43; and terms from one to sixty months.

 

At December 31, 2022, the Company estimated the fair value of the conversion feature derivatives embedded in the notes payable and warrants based on assumptions used in the Cox-Ross-Rubinstein binomial pricing model using the following inputs: the price of the Company’s common stock of $0.56; risk-free interest rates ranging from 3.99% to 4.76%; expected volatility of the Company’s common stock ranging from 183% to 572%; estimated exercise prices ranging from $0.35 to $0.75; and terms from three to sixty months.

 

10
 

 

CLEARDAY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

A reconciliation of the changes in the Company’s Level 3 derivative liability at fair value is as follows:

 

      
Balance - December 31, 2022  $2,320,547 
Additions   3,707,038 
Settlements   (713,435)
Change in fair value   (1,565,232)
Balance - March 31, 2023  $3,748,918 

 

Convertible Instruments

 

The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC Topic 815, “Derivatives and Hedging Activities”.

 

Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

 

The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The Company records when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.

 

Research and Development Costs

 

Research and development costs are charged to expense as incurred and are included in operating expenses. There was no research and development costs incurred in the first quarter of 2023 or 2022.

 

Advertising Costs

 

The costs of advertising are expensed as incurred. Advertising expenses are included in the Company’s operating expenses. There was no advertising expenses in the first quarter of 2023 or 2022.

 

Lease Accounting

 

The Company follows ASC Topic 842, “Leases”. The Company has elected the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. All ROU assets were written off effective March 31, 2023, when the Company disposed the three leased properties described in Note 5 Leases.

 

Income Taxes

 

The Company’s income tax expense includes U.S. income taxes. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences to be included in the Company’s condensed consolidated financial statements. Under this method, deferred tax assets and liabilities are determined 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.

 

11
 

 

CLEARDAY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that has a 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.

 

Company includes the related tax expense or tax benefit within the tax provision in the condensed consolidated statement of operations in that period. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In the future, if the Company determines that it would be able to realize its deferred tax assets in excess of their net recorded amount, the Company will make an adjustment to the deferred tax asset valuation allowance and record an income tax benefit within the tax provision in the condensed consolidated statement of operations in that period.

 

The Company pays franchise taxes in certain states in which it has operations. The Company has included franchise taxes in general and administrative and operating expenses in its condensed consolidated statements of operations.

 

Earnings Per Share

 

FASB ASC Topic 260, “Earnings Per Share”, requires a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share (EPS) computations.

 

Basic earnings (loss) per share are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.

 

Commitments and Contingencies

 

The Company has been, is currently, and expects in the future to be involved in claims, lawsuits, and regulatory and other government audits, investigations and proceedings arising in the ordinary course of the Company’s business, some of which may involve material amounts. The Company establish accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Also, the defense and resolution of these claims, lawsuits, and regulatory and other government audits, investigations and proceedings may require the Company to incur significant expense. The Company accounts for claims and litigation losses in accordance with ASC Topic 450, “Contingencies”. Under ASC Topic 450, loss contingency provisions are recorded for probable and estimable losses at the Company’s best estimate of a loss or, when a best estimate cannot be made, at the Company’s estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment, and are refined as additional information becomes known. Accordingly, the Company is often initially unable to develop a best estimate of loss and therefore the estimated minimum loss amount, which could be zero, is recorded; then, as information becomes known, the minimum loss amount is updated, as appropriate. Occasionally, a minimum or best estimate amount may be increased or decreased when events result in a changed expectation.

 

Recently Issued Accounting Pronouncements

 

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (a) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (b) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (c) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share for convertible instruments by using the “if-converted” method. In addition, entities must presume share settlement for purposes of calculating diluted earnings per share when an instrument may be settled in cash or shares. For smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023. The Company is currently evaluating the impact that ASU 2020-06 may have on its financial statements and related disclosures.

 

12
 

 

CLEARDAY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

As of March 31, 2023, there were several new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.

 

3. Real Estate, Property and Equipment

 

The Company’s real estate, property and equipment consisted of the following at the respective balance sheet dates:

 

   March 31,
2023
   December 31,
2022
 
         
Land  $2,231,879   $2,231,879 
Building and building improvements   4,975,243    4,975,243 
Leasehold Improvements   710,317    846,754 
Computers   57,192    332,809 
Furniture, fixtures, and equipment   72,213    1,379,219 
Other Equipment   74,935    518,145 
Work in progress   138,188    138,187 
Total   8,259,965    10,422,236 
Less accumulated depreciation   (2,032,002)   (3,899,257)
Real estate, property and equipment, net  $6,227,965   $6,522,979 

 

The Company recorded depreciation expenses relating to real estate, property, and equipment in the amount of $83,525 and $501,797 for the periods ended March 31, 2023, and 2022, respectively.

 

4. Intangible Assets

 

Software Capitalization.

 

With regards to developing software, any application costs incurred during the development state, both internal expenses and those paid to third parties are capitalized and amortized per FASB Topic ASC350-40 (“Internal-Use Software Accounting & Capitalization”). Once the software has been developed, the costs to maintain and train others for its use will be expensed. At March 31, 2023 and March 31, 2022, $3,496,000 and $2,240,000, respectively were the balances that will be amortized based on the estimated useful life of five years. The Company began this amortization starting January 1, 2023.

 

Acquired intangible assets subject to amortization are as follows:

 

Schedule of Expected Future Amortization Expense for Intangible Assets

                     
   March 31, 2023 
  

Gross Carrying

Amount

  

Accumulated

Amortization

  

Net Carrying

Amount

  

Weighted-Average

Remaining Useful

Life (Years)

 
Developed technology  $3,680,000   $184,000   $3,496,000    4.75 

 

Expected future amortization expense for intangible assets as of March 31, 2023 is as follows:

 

      
Fiscal Years    
2023  $552,000 
2024   736,000 
2025   736,000 
2026   736,000 
2027   736,000 
Thereafter   - 
Total  $3,496,000 

 

 

                                 
    March 31, 2022  
   

Gross Carrying

Amount

   

Accumulated

Amortization

    Net Carrying
Amount
   

Weighted-Average

Remaining Useful

Life (Years)

 
Developed technology   $ 2,240,000     $ -     $ 2,240,000       5.75  

 

5. Leases

 

Lease Terminations

 

On March 31, 2023, the Company entered into agreements (collectively, the “Lease Termination Agreement”) to terminate the leases (“Community Leases”) for three of its four residential care facilities, which account for all of Clearday’s leased residential care facilities. The Community Leases related to residential communities (the “Communities”) located in Westover, Texas, New Braunfels, Texas and Little Rock, Arkansas. Terminating the Community Leases will remove Right of Use liabilities and right of use assets related to these Community Leases, as of December 31, 2022 and the write-off or elimination of the related net leasehold improvements and personal property in these Communities. As of March 31, 2023, we had no material economic rights or obligations under the Community Leases other than for payment obligations under the Lease Termination Agreements. The tenants of the Community Leases and the guarantors, including Clearday, Inc., entered a Lease Transition Agreement with the Lessor of the properties dated March 31, 2023. The Lease Transition Agreement provided, among other matters, that the aggregate liability of the Clearday subsidiaries that are tenants under the Community Leases are reduced to amount (the “Repayment Amount”) that is equal to the sum of: (1) past due rent payments under the Community Leases of $1,284,770 (“Past Due Community Lease Amounts”), (2) a fixed amount arising from the termination of the Community Leases of $1,710,777 (“Rent Differential Amount”), (3) the amount of additional advances (“Critical Expenses Advances”) by Landlord to pay critical expenses plus the premium for tail insurance policy in favor of the Landlord (the obligation for such premiums are limited $275,000), (4) plus an additional amount that is equal to the greater of $25,000 or 5% of such Critical Expenses Advances. The Critical Expense Advances and additional amount were determined in the second quarter of 2023. The Repayment Amount is due and payable over a period maturing on July 31, 2025, as follows: (1) on closing date of the previously announced proposed merger with Viveon Health Acquisition Corp. (the “Viveon Merger”), a payment equal to 10% of the new money that is raised in connection with the Viveon Merger (subject to a minimum payment of $300,000 and a maximum payment of $500,000); provided that if the Viveon Merger does not close by July 31, 2023, then a payment of $300,000 will be paid on July 31, 2023 or such other date agreed by Landlord and Clearday; (2) $400,000 payable quarterly commencing on December 31, 2023, and (3) beginning with the calendar quarter ending December 31, 2023 10% of the Excess Cash Flow, generally based on earnings before interest, taxes, depreciation, and amortization of Clearday. The current guarantors of the Community Leases (a subsidiary of Clearday, Inc. and two individuals) continued to guaranty the obligations, as modified by the Lease Transition Agreement, and provided a security interests on the collateral specified in such guarantees.

 

13
 

 

CLEARDAY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In connection with the Lease Termination Agreements, the tenants under the Community Leases and the Clearday, Inc. subsidiaries that operated the Communities signed a promissory note for the Repayment Amount and the Past Due Community Lease Amounts and Clearday, Inc. agreed to be an additional guarantor of the obligations of the Community Leases, as modified and limited by the Community Lease Transition Agreement, which is less than approximately $4,000,000 under the terms of a Guaranty (the “Guaranty”). Clearday also agreed to cooperate with Landlord to facility the termination of the Community Leases the sale of the furniture and fixtures at the Communities to the New Operator so that New Operator may enter into a lease or purchase of the Communities and operate the memory care businesses in the Communities or other businesses at the Communities that they choose to conduct.

 

In connection with the proposed termination of the Community Leases, the subsidiaries that operate the Communities (the “Current Operators”) and subsidiaries of the New Operator (“New Communities Operators”) entered into the Operations Transfer Agreement dated as of April 1, 2023 (the “OTA”). The OTA provides that the New Communities Operators will purchase the personal property and other assets of the Current Operators used at the Communities to enable the New Communities Operators to conduct their business at the Communities under new leases or other arrangements with the Landlord. Such purchase and sale will close on the date that the New Communities Operators receive the licenses, authorizations and approvals from the applicable Texas and Arkansas governmental agencies to conduct a licensed residential memory care business at the Communities and they enter into new leases with the Landlord (the “Commencement Date”). The New Communities Operators will enter into new agreements with the residents at the Communities, effective the Commencement Date, which agreements, according to statements by the New Communities Operators, will be at the same price as the rates charged by Current Operators. The Current Operators have provided a notice to each of the residents at the Communities that their current agreement will terminate, effective the Commencement Date. In connection with the OTA, the Current Operators and the New Communities Operators entered into Interim Management and Security Agreements or an Interim Consulting and Security Agreement, as applicable, dated as of April 1, 2023 (the “Interim Agreements”). The Interim Agreements provide that the New Communities Operators will assist with operating the Communities as an independent contractor, pending their receipt of government authorizations and approvals necessary to operate memory care residential care businesses at the Communities. The New Communities Operators are not affiliated with the Company or its officers or directors. The OTA and Interim Agreements provide for the asset purchase and sale of the memory care businesses at the Communities, and the transfer of certain agreements and the assumption of certain specified liabilities. The Current Operators, each of which is a subsidiary of Clearday, Inc., remain obligated for liabilities that are not assumed by the New Operators. Under the Interim Agreements, the New Communities Operators is an independent contractor that has employed, or offered employment to, all of the employees of the Current Operators at the Communities and will fund and be responsible for any operating cash losses for the Communities.

 

6. Discontinued Operations

 

The following statement is the condensed consolidated statement of operations for the Company’s discontinued operations for the period ended March 31, 2023: 

 

      
REVENUES     
Commercial property rental revenue  $14,239 
Total revenues, net   14,239 
      
Costs and expenses     
Operating expenses   - 
General and administrative expenses   36,636 
Total operating expenses  $36,636 
      
Loss from operations   (22,307)
      
Other/(income) expenses     
Interest expense   44,151 
Gain on disposal of assets   - 
Equity income from investees, net of applicable taxes   - 
Impairment expense (recovery)   - 
Other (income) expenses   18,768 
Total (income)/expense   62,920 
      
Net loss  $(85,227)

 

7. Indebtedness

 

As of March 31, 2023 and December 31, 2022, the current portion of long-term debt within the Company’s financial statements was $22,925,835 and $18,744,501, respectively.

 

During the periods ended March 31, 2023 and 2022, we incurred interest expenses totaling $549,033 and $501,598, respectively.

 

14
 

 

CLEARDAY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table summarizes the Company’s debt as of March 31, 2023 and December 31, 2022:

 

As of March 31,  Total 
2022   6,839,277 
2023   9,635,591 
2024   1,494,886 
2025   4,461,182 
Thereafter   494,900 
Total obligations  $22,925,835 

 

Indebtedness of Facilities

  Maturity Date  Interest Rate   March 31,
2023
  

December 31,

2022

 
Naples Equity Loan ^  May 2023   9.95%  $4,550,000   $4,550,000 
Gearhart Loan ^  December 2022   7.00%   193,578    193,578 
SBA PPP Loans #  February 2022   1.00%   1,518,682    1,518,682 
Bank Direct Payable ^  December 2022   3.13%   31,569    80,381 
AIU Sixth Street  February 2023   12.00%   -    49,593 

1800 Diagonal Lending

  October 2024   12.00%   93,408    116,760 

1800 Diagonal Lending

  February 2024   12.00%   173,595    - 
Equity Secure Fund I, LLC*  June 2022   11.50%   1,000,000    1,000,000 
Invesque 

July 2025

   0%   

3,458,504

    - 

 

Merchant Cash Advance Loans (^^)

 

Naples Operating PIRS Capital  March 2023   0.00%  $338,000   $338,000 
Little Rock Libertas  February 2023   0.00%   326,330    326,330 
PIRS Capital Financing Agreement  March 2023   0.00%   144,659    144,659 
Naples Samson #1  May 2023   0.00%   76,916    76,916 
Naples LG Funding #2  April 2023   0.00%   171,170    171,170 
Little Rock Premium Funding  April 2023   0.00%   211,313    211,313 
Little Rock KIT Funding  December 2022   0.00%   89,400    89,400 
Little Rock Samson Funding #4  February 2023   0.00%   170,501    170,501 
Naples Operating SWIFT  December 2022   0.00%   111,750    111,750 
New Braunfels Samson Cloud Fund  February 2023   0.00%   308,035    308,035 
New Braunfels Samson Group  February 2023   0.00%   375,804    375,804 
Westover Hills One River  December 2022   0.00%   128,298    128,301 
Westover Hills FOX Capitol  March 2023   0.00%   109,384    109,384 
Westover Hills Arsenal  October 2023   0.00%   95,882    95,882 
Westover Samson Funding  March 2023   0.00%   267,754    267,754 
Notional amount of debt         13,944,531    10,434,193 
Less: current maturities         13,944,531    10,434,193 
        $-   $- 

 

15
 

 

CLEARDAY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Indebtedness Allocated to Assets Held For Sale

 

Real Estate:           
Artesia Note  June 2033   Variable   $-   $211,721 
Carpenter Enterprises   Demand Note   Variable    300,000    300,000 
Leander Stearns National Association ^  February 2023   10.38%   805,000    805,000 
Notional amount of debt         1,105,000    1,316,721 
Less: current maturities         805,000    805,000 
        $300,000   $511,721 

 

Other (Corporate) Indebtedness

               
AGP Contract ^   March 2023   2.00%  $550,000   $550,000 
Cibolo Creek Partners  December 2025   0.09%   411,470   $421,470 
Cibolo Creek Partners promissory note  December 2025   0.09%   91,208    96,208 
EIDL SBA Treas 310  December 2051   3.75%   494,900    494,900 
Firstfire  May 2023   12.00%   37,195    95,054 
Five C’s Loan ^  December 2022   9.85%   325,000    325,000 
GS Capital  May 2023   12.00%   12,048    50,955 
Jefferson Street Capital LLC @  May 2023   12.00%   33,600    84,000 
KOBO, L.P. ^  October 2023   Floating%   500,000    500,000 
Mast Hill LP @  May 2023   12.00%   300,000    420,000 
Mast Hill LP @  July 2023   12.00%   252,000    315,000 
Round Rock Development Partners Note  December 2025   0.09%   500,000    500,000 
Jefferson Street Capital LLC (February 2023) 

February 2024

   12.00%   135,000    - 
Mast Hill LP (January 2023) 

January 2024

   12.00%   756,000    - 
Convertible Notes Issued by AIU Alternative Care, Inc. 

January 2024

   12.00%   279,000    - 
                   
Notional amount of debt         4,735,304    3,852,587 
Less: current maturities           2,009,843    2,340,009 
           $2,725,461   $1,512,578 
                   
TIC Purchase Agreements  No Specified Date   8.00%  $3,141,000   $3,141,000 
                   
Other Current Liabilities                  
Related Party Payable         496,305    672,597 
        $496,305   $672,597 
                   
       Total    22,925,835    18,744,501 
       Less Debt Discount & Derivatives     (1,554,177)   (1,004,271)
       Total   $21,371,658   $17,740,230 

 

^ Obligation is in default.
^^ We have ceased payment of these obligations. Obligations are subject to litigation for nonpayment, as previously reported. See Note 8 Commitments and Contingencies.
# SBA PPP obligations are past due and in the Company is continuing the process to have these obligations forgiven.
@ Obligation is in payment default. Each lender has not exercised any of their remedies and the Company continues to negotiate with each lender a payment schedule.
* Obligations have been modified as described in Note 13 Subsequent Events.

 

16
 

 

CLEARDAY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Mast Hill Financing – January 2023

 

On January 13, 2023, the Company incurred a loan in the principal amount of $756,000, by issuing a promissory note (“MH Loan 1 Note”) that included original issue discount of $75,600. The Company paid $68,040 in placement fees and $12,000 of legal fees and expenses of the lender. The net proceeds of this loan were used to repay the obligations of a mortgage on a land asset held by a subsidiary (“Artesia”) of approximately $213,000 and the remaining amount was used for general working purposes. The obligations under this loan 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 MH Loan 1 Note. The loan is due and payable on January 26, 2024. Interest and principal are payable from and after April 12, 2023, subject to a five business day grace period, in equal monthly payments of $75,600 plus accrued and unpaid interest, subject to the Company’s 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. The loan may be prepaid upon notice of seven trading days without payment or penalties or fees other than a $750 administrative fee. The Company paid the lender a commitment fee of 83,160 shares of its common stock (“MH Loan 1 Commitment Shares”) and issued two warrants to the lender. One warrant (the “MH Loan Note Warrant”) may be exercised for 1,134,000 shares of the Company’s common stock from and after an Event of Default, as defined under MH Loan 1 Note, at a price per share of $0.75. The other warrant (the “MH Loan 1 Other Warrant”) may be exercised for 851,000 shares of the Company’s common stock at a price per share of $0.75. Each of the MH Loan 1 Note Warrant and the MH Loan 1 Other Warrant provide for customary “cashless” exercise of such warrant and adjustments to the exercise price and shares underlying each warrant, including adjustment in the event of an issuance of common stock or deemed issuance of common stock at a price that is lower than then exercise price on a “full rachet” basis. Artesia absolutely and unconditionally guaranteed to the lender the full amount of the loan under the terms and conditions of that certain guaranty (the “Guaranty”). Such Guarantee is secured by all assets of Artesia and the proceeds therefrom, including the land asset located at 6465 7 Rivers Highway, Artesia, NM. Artesia has agreed to record a mortgage with respect to such property in form mutually determined by Lender and Artesia. The lender has certain remedies, including the right to convert the unpaid amount of the loan, from and after an Event of Default, at a price per share equal to $0.50. The exercise price of each warrant and the conversion price of MH Loan 1 Note are subject to adjustment in the event the Company issues shares of common stock or equivalents at a price per share that is lower than then exercise or conversion price. The Company reserved shares of its common stock for issuance upon conversion of MH Loan 1 Note or the warrants and has agreed to register the shares of common stock for resale under the Securities Act of 1933, as amended. The Company granted the lender with a right of first refusal with respect to any bona fide offer of any financing , subject to exceptions for certain specified transactions: (1) a bona fide offer of capital or financing from a nationally recognized broker dealer that is retained by Borrower and acceptable to the Holder, which acceptance will not be unreasonably delayed, withheld or conditioned (“Investment Banker”), or any person or party that is introduced to the Company by the Investment Banker in its capacity as a placement agent, (ii) a bona fide offer of capital or financing from a person or party if such capital or financing is used by the Company for the acquisition or refinance of real property so long as (a) any security interest granted to such person or party is solely limited to the real property being acquired or refinanced and (b) such person or party shall have no rights at any time in such transaction or any related transaction to acquire Common Stock or Common Stock Equivalents of the Company (each a “Real Property Transaction”), as well as (iii) a bona fide offer of specified capital or financing through certain financing transactions. MH Loan 1 Note is subject to repayment from the use of proceeds of certain transactions. If, prior to the full repayment or satisfaction of the MH Loan 1 Note’s obligations, the Company receives cash proceeds of more than $2,000,000.00 (the “Minimum Threshold”) in the aggregate, from the sale of assets or issuance of the Company’s securities, including pursuant to an Equity Line of Credit (as defined in MH Loan 1 Note), then the Lender may require us to apply up to 50% of such proceeds after the Minimum Threshold to repay all or any portion of the outstanding obligation under the Note; provided that such repayment obligation is not applicable to Real Property Transactions, the sale of assets to customers of the Company in the ordinary course of business, the sale of interests in real estate, or any Small Business Administration Economic Injury Disaster Loan. Additionally, the Company provided the lender with rights to receive terms provided under any other financing transaction that are more favorable than under MH Loan 1 Note, other than Real Property Transactions and certain other transactions.

 

1800 Diagonal Lending – February 2023

 

On February 10, 2023, the Company issued an unsecured promissory note (the “1800 Note”) to an institutional lender in the aggregate amount of $194,360, including original issue discount of $20,824. The Company used the proceeds of this financing to fund the Company’s operations and repay approximately $19,280 of existing indebtedness to this lender that was incurred April 5, 2022. The 1800 Note provides for the net funding to Clearday of $150,000 after payment of specified expenses of $4,250 and provides for an original issue discount of $19,286, resulting in a principal obligation of $194,360 and a one-time interest charge of 12% on such principal amount.

 

The 1800 Note provides for a one-year maturity. Monthly payments on the 1800 Note of approximately $21,768 will be made by Clearday with the first payment being on March 30, 2023, which payments are subject to a 10-day grace period. The 1800 Note provides specified events of default (an “Event of Default”) including failure to timely pay the monetary obligations under the 1800 Note and such breach continues for a period of ten (10) days after written notice from the 1800 Noteholder’ a breach of covenants under the 1800 Note or the Purchase Agreement that continues for a period of twenty (20) days after written notice by the 1800 Noteholder; breach of any representation and warranty in the 1800 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 OTCQX or 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.

 

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CLEARDAY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Upon any Event of Default, the obligations under the 1800 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 1800 Note, provide the 1800 Noteholder the right and option to convert the obligations under the 1800 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 1800 Noteholder is subject to a customary limitation on beneficial ownership of 4.99% of Clearday’s common stock.

 

Jefferson Street – February 2023

 

On February 17, 2023, the Company issued an unsecured promissory note (the “Jefferson Street Note”) to an institutional lender. the Company used the net proceeds of this financing to fund the Company’s operations.

 

On February 17, 2023, the Company entered into a Securities Purchase Agreement with an institutional lender (the “Lender”) to issue an unsecured promissory note (the “Jefferson Street Note”) to the Lender. This Jefferson Street Note provides for the proceeds to us of approximately $135,000 and provides for an original issue discount of $22,217 or 12%, resulting in a principal obligation of $172,217. The Company paid $15,000 in placement fees in connection with the issuance and sale of the securities to the Lender. The Jefferson Street Note provides a one-time interest charge of 12% on such principal amount or $20,666 and a one-year maturity. Monthly payments on the Jefferson Street Note of the accrued, unpaid interest and outstanding principal, subject to adjustment, shall be paid in ten (10) payments each in the amount of $19,288.30 (a total payback to the Holder of $192,883). The first such payment is due April 16, 2023, with nine (9) subsequent payments each month thereafter, which payments are subject to a 10 day grace period, or shorter if the payment date is not a business day.

 

The Jefferson Street Note provides specified events of default (a “Event of Default”) including failure to timely pay the monetary obligations under the Jefferson Street Note and such breach continues for a period of ten (10) days after written notice from the Jefferson Street Noteholder’ a breach of covenants under the Jefferson Street Note or the Securities Purchase Agreement that continues for a period of twenty (20) days after written notice by the Jefferson Street Noteholder; breach of any representation and warranty in the Jefferson Street Note or Securities 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 Event of Default, the obligations under the Jefferson Street 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 Jefferson Street Note, provide the Jefferson Street Noteholder the right and option to convert the obligations under the Jefferson Street 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 Street Note is subject to a customary limitation on beneficial ownership of 4.99% of Clearday’s common stock. Each of the Jefferson Street Note and the Securities 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 Street 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 Street Note.

 

As additional consideration, the Company issued to the Lender a Common Stock Purchase Jefferson Street Warrant (“Jefferson Street Warrant”) to purchase 225,000 shares of the Company’s Common Stock at an exercise price per share of $0.75. The Jefferson Street Warrant expires five years from March 16, 2023. The Jefferson Street Warrant provides for customary “cashless” exercise of such Jefferson Street Warrant and adjustments to the exercise price and shares underlying each warrant, including adjustment in the event of an issuance of common stock or deemed issuance of common stock at a price that is lower than then exercise price on a “full rachet” basis.

 

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