UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For
the fiscal year ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from _____________to____________
Commission
File Number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (IRS Employer | |
| incorporation or organization) | Identification No.) |
(Address of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| OTCQX |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ or
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ or
Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files).
Indicate by check mark whether the registrant is a large, accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large, accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large, accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ or
The
aggregate market value of the common stock held by non-affiliates was approximately $
We had approximately shares of common stock outstanding as of the close of business on April 30, 2023.
CLEARDAY, INC.
FORM 10-K ANNUAL REPORT
Year Ended December 31, 2022
References in this Report to “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.
| i |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (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 “anticipates,” “believes,” “can,” “could,” “estimates” “expects,” “intends,” “may,” “plans,” “should,” “seeks,” “will,” “would” and other comparable terminology.
We caution investors that any forward-looking statements presented in this Report, or that we may make orally or in writing from time to time, are based on the beliefs of, assumptions made by, and information currently available to, us. Such statements are based on assumptions and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations, and those differences may be material. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include the following:
| ● | Our limited cash and a history of losses; | |
| ● | Our ability to fund our innovative care products and services, including our Longevity-tech platform and other 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 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; | |
| ● | 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in this Report.
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.
| 1 |
PART I
| ITEM 1. | BUSINESS |
Recent Events
We shifted our business strategy to move from a facility-driven real estate business to a health technology company in order to capture the massive unmet need caused by today’s disconnected longevity-tech market. We provide technologies and innovative care solutions to address the global aging crises. We have used our extensive experience in senior care, including owning and operating high-performing residential care facilities in the most challenging senior care venues (Memory and Alzheimer’s treatment), to develop our purpose-built Longevity-tech platform for the 170 million Americans turning 50 by 2030. Our Longevity-tech platform intentionally moves our focus from a facility-driven real estate business to a healthcare technologies business that is designed to capture the massive unmet senior care need. We believe that the currently available longevity-tech solutions do not address this significant market and that we are able to modernize the nearly 54,000 U.S. daily care, skilled nursing, and long-term care facilities.
We began our investment in our residential care facilities under the Memory Care America brand in 2016. In 2019, we began to develop innovative products and services to address the ongoing and worsening aging crises and developed our Clearday Club concept. In 2021 we began the development of robotic services. During 2022, we advanced our robotic service applications, deployed robotic services in our residential care facilities and began working with TRECS Institute.
The TRECS Institute (TRECS) is a non-profit organization dedicated to finding new and effective opportunities to better serve America’s growing senior population while reducing costs for our health care system. We believe that TRECS Executive Director, John Whitman, is a thought leader for transformational technologies that may advance and elevate care and/or reduce costs and that our relationship with TRECS provides independent validation of our Longevity-tech platform. During December, 2022, we and TRECS developed a strategy to use funds available through Civil Money Penalty Reinvestment Programs (CMPRPs) that are available in all 50 states. A CMPRP is funded, in large part, by the appliable government agency using Civil Money Penalties (CMPs) that are assessed against facilities for either the number of days or for each instance that such facility is not in substantial compliance with one or more Medicare and Medicaid participation requirements for long-term care facilities. The CMPRP funds are available through grant applications programs (“CMP Grants”). A facility may receive funds from a CMPRP if the applicable CMP Grant is approved. During the first quarter of 2023, TRECS engaged in a nationwide effort to apply for CMP Grants, in each state, to fund the investment of adding our robotic services and related digital services to facilities homes that will benefit from increased quality assurance and improved performance.
We have recently begun marketing the following technologies that we developed in 2022:
| ● | Our proprietary Longevity-tech platform including edutainment (content that is educational but has incidental entertainment to increase engagement and retention) and interactivity through our proprietary interactive content that is generally available on any digital device; | |
| ● | Our proprietary B.E.S.T. (Behavior | Engagement | Stimulation | Temperament) test that is used to develop personalized care pathways; and | |
| ● | Artificial intelligence (AI) enabled companion robotic services that include proprietary applications that enhance the user experience through proprietary digital engagement programs as well as movement analytics. |
| 2 |
As part of the implementation of this business strategy, we
| ● | entered into a merger agreement (“Viveon Merger Agreement”) with Viveon Health Acquisition Corp., a Delaware corporation (“Viveon”), that is a special purpose acquisition corporation or SPAC and that has its shares of common stock listed on the NYSE American exchange; and | |
| ● | exited from three of our four residential care facilities and limit our financial investment in the capital-intensive residential memory care businesses by terminating our leases (“MC Facility Leases”) of these three facilities (“MC Facilities”). |
We believe that shifting our business strategy will enable us to achieve profitability, provide greater value to our stockholders and businesses and is one of the key reasons that Viveon chose to enter a business combination or deSPAC transaction (the “Viveon Merger”) with us at a valuation that is significantly greater than the value of our common stock market capitalization. The total consideration to be paid at closing (“Viveon Merger Closing”) under the Merger Agreement (the “Viveon Merger Consideration”) by Viveon to Clearday security holders (and those who have the right to acquire our capital stock) is significantly above our reported OTCQX market capitalization. The Viveon Merger Agreement provides for additional consideration of 5,000,000 shares of Viveon common stock, which has a value as of the Viveon Merger Closing of $50 million, that will be earned if we achieve specified earnout milestones, including profitability for any 12-month period during the 5-year period after the Viveon Merger Closing. The Viveon Merger is a stock for stock merger that is structured to not have any income tax recognition for Clearday stockholders (and those who have the right to acquire our capital stock). We and Viveon have begun marketing to raise additional capital to fund our innovative care businesses and our other obligations after the Viveon Merger Closing. Additional information regarding the Viveon Merger was provided in our Current Report on Form 8-K that was filed on April 10, 2023. There can be no assurance that the proposed Viveon Merger or any of the financing transactions will be consummated on the terms or timeframe currently contemplated, or at all.
In connection with the Viveon Merger we have solicited additional investment that would close prior the Viveon Merger Closing or “bridge financing” and have received approximately $344,200 prior to closing any such additional bridge financing, net of expenses and fees, and has advanced approximately $223,415 of such amount to Viveon for their business expenses.
We terminated the MC Facility Leases, which are all our leased memory care residential care facilities. These agreements provide for the third party negotiated exit by us of our legacy memory care businesses at these facilities that had large operating expenses, including lease payments, and incurred significant cash flow losses during 2022 that required us to incur indebtedness. Based on our 2022 operating results, we expect that the termination of these leases will save approximately $12.9 million of expenses, annually, or net annual cash savings of at least $3.3 million. After the consummation of the lease terminations, we will continue to own and operate our residential memory care facility located in Naples, Florida and our Adult Daycare center located in San Antonio, Texas. We will conduct those businesses and expect to expand our businesses using our innovative Longevity-tech platform and additional adult day care and other businesses.
Terminating the MC Facility Leases will remove, effective March 31, 2023, approximately $27,520,000 of liabilities related to the lease, as of December 31, 2022, and approximately $22,991,000 of operating lease right-of use assets, which will result in a one-time increase of other income of approximately $4,520,00, prior to the elimination of our net leasehold improvements and personal property in these facilities that is less than $250,000, as of December 31, 2022 and prior to the lease termination fee payable to the landlord. Additionally, the termination of the MC Facility Leases and our legacy memory care businesses at these MC Facilities should significantly reduce the operating cash flow losses that we have incurred at these MC Facilities enabling us to focus on our businesses that use our Longevity-tech platform that provide personalized care pathways; artificial intelligence (AI) enabled companion robotic services that include proprietary applications to enhance a user experience through proprietary digital engagement programs as well as movement analytics.
As part of our strategy, we continue to develop several marketing channels for our innovative care products and services, including through our alliance with TRECS. We believe that our alliance with TRECS which we have advanced during the first quarter of 2023, provides us a competitive advantage as a highly regarded thought leader in the senior care industry, and supports and advocates for the adoption of our Longevity-tech platform by residential care facilities. Under our alliance with TRECS, TRECS submits applications to state authorities for Civil Money Penalty Grants that may be used by skilled nursing and other senior care facilities to fund the purchase or rental of our companion robots that include our digital care solutions. We also continue to pursue other sales opportunities, including international sales.
The Company believes that it can expand its adult day care business that focuses on veterans, similar to its Primrose facility. We are actively looking for additional locations and intend to use funds from any bridge financing or from the Viveon Merger to acquire, lease and open additional locations in Central Texas.
| 3 |
General
We have developed a purpose-built longevity-tech platform that addresses the most pressing operational and care gaps in the longevity care market: quality of care and revenue growth. Our Longevity-tech platform enables us to become a health-tech leader. We have recently advanced the sales and marketing of our innovative care products and services that we developed since 2020, and that, we believe, creates the future of care for aging populations everywhere. Our Longevity-tech platform leverages our longevity care experience in the most challenging senior care venues (Memory and Alzheimer’s treatment.) It provides our longevity-tech solutions to the future generations whose comfort with technology, digital companionship, and virtual connections, we believe, will become the standard for aging in place.
We began developing alternative care products and solutions in 2019 when we raised capital through the issuance of Alt Care Preferred Stock and the Clearday OZ LP Interests, which we describe in “Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Equity of Subsidiary - Non-Controlling Interest” and developed our proprietary adult day care model and digital delivery of care which digitized certain of our time-tested and proven treatments and models, which extend people’s capacity to age gracefully. We then engineered these solutions to be accessed seamlessly at critical points of care through autonomous robotic services and other technologies. Our development efforts and Longevity-tech platform focus on connecting people to solutions, treatments, and care they need, from their homes to full-time care facilities, so they may age in the right place. This approach allows us to provide products and services to the multi-billion longevity care market throughout the market continuum: at home, in a skilled nursing facility, or at a daily-care or full-time living facility and through a full spectrum of solutions accessed through a digitally enabled environment where every interaction works to build a more comprehensive understanding of their well-being, including Clearday TV screens, tablets, robots, wearables, and other sensors.
Our Longevity-tech platform may capture various data required to make informed health decisions. Our “care genome” combines the behavioral, engagement, stimulation, and temperament diagnostics necessary to maximize treatment efficacy. The B.E.S.T. test framework enables us to monitor, interpret, and recommend changes to care. With this knowledge, an individual’s care team, family, and caregivers are empowered to make informed and wise decisions for their loved one’s elder care. Our Longevity-tech platform will enable a dedicated connection between families and communities that can provide new insights, monitoring, and engagement opportunities through our numerous touchpoints, including live events and therapies, group calls, and management of OT/PT and treatment adherence.
During 2022 before we were able to launch the marketing sales phase of our Longevity-tech platform, we operated four residential care facilities and a day care center that serve primarily older Americans and persons facing cognitive issues such as Alzheimer’s and other forms of dementia. These facilities were our centers of cognitive excellence in which we have developed new care models that improve the experiences of our customers, their families, and our caregivers.
Clearday believes that:
| ● | The U.S. elder care market is large and expected, by 2030, to have a global population over 50 years of age that: |
| - | Has more than 1 billion people, globally, and | |
| - | Has more than 170 million people in the U.S. |
| ● | There is a significant caregiver shortage, and it is estimated that for every 43 positions, there is only one available caregiver; | |
| ● | There are a limited number of facilities that contributes to an expensive solution for seniors, with an estimated 3.5 million people over 65 spending more than $12 billion on care per month; | |
| ● | Approximately 16 million Americans provide unpaid care for people with Alzheimer’s or other forms of dementia, which represents a significant number of people that could enter or return to the paid workforce if alternatives such as affordable adult day care were available; | |
| ● | Approximately, 7.2 million Americans today live with Alzheimer’s disease or other forms of dementia, and it is expected that over the next 20 years, the total number of those living with Alzheimer’s disease or other forms of dementia in the U.S. is expected to approximately double from 7.2 million to nearly 13 million, with 8.5 million women and 4.5 million men; and | |
| ● | More than 75% of the help provided to older adults in the United States is provided by family members, friends or other unpaid caregivers. |
Innovation by Leveraging Technologies
Our technologies provide a combination of AI-enabled robotics and software, delivered in a Platform-as-a-Service as a drop-in modernization solution for existing facilities that improves patient outcomes, increases staff efficiency, and unlocks premium revenue opportunities for operators. We believe that providing our technologies through as a Platform-as-a-Service (PaaS) provides senior care facility operators an optimal path to more revenue, increased care quality, and lower overall costs:
Our PaaS structure provides advantages, including:
| ● | Integrated services of hardware and software subscription for Companion Robotics, Digital Assessments, and Interactive Content. | |
| ● | A format that makes it easy to buy and deploy sophisticated technologies as our technologies are delivered in a turn-key fashion to facilities with the opportunities of low-cost subsidized pricing through government or sponsored programs for qualified facilities. | |
| ● | Relatively low friction to deploy with a typical deployment that should be less than 30 days with no material disruption to facility services or significant time for training. |
| 4 |
Adult Day Care—Clearday Clubs
We acquired an adult day care center in San Antonio, Texas in May 2021, and plan to develop a Clearday Club adult day care at our San Antonio headquarters building and develop a network of local, membership-based centers, which will provide to the older care market a high-standard, technology-enabled care option that is significantly less expensive than long-term residential care alternatives. Our Clearday Clubs adult day care will offer services through a monthly subscription and be characterized by welcoming facilities, trained staff, and personalized care programs that may be tailored to individual member needs. Each of the Clearday Clubs will utilize the proprietary format and programs, enabling Clearday to quickly and efficiently roll out or expand its Clearday Clubs at an efficient standard cost per center.
Our San Antonio adult day care center primarily serves veterans who receive subsidies from the U.S. Veterans Department (the VA). During the first quarter of 2023, we deployed our proprietary robotic services and other proprietary digital services at this center with success. Shortly after our deployment, we were able to substantially increase our rate (more than double) and expect to be able substantially scale our adult day care center business in Central Texas with centers that also primarily serve veterans.
Clearday Clubs is positioned by us to be an integral part of Clearday, building the complete care spectrum for older Americans enabling people to stay in their homes longer and conserve their savings. Clearday believes that the adult day care centers will be able to provide many of the full-day residential care services at a fraction of the cost. Clearday believes that current adult day care market participants include many smaller local businesses that do not provide the level of technology-enabled care, proven programming, and best practices expertise that will be provided by Clearday.
Residential Memory Care
We expect to continue to operate our Naples, Florida residential memory care facility. We have substantial experience in the residential care business which we expect to continue to leverage to develop, deploy, and improve innovative care products and services. There are 26 diagnoses of dementia, including Alzheimer’s disease. 25 of these diagnoses may be treated in a community setting and our residential care communities treat each of these 25 diagnoses. We believe that our facilities are a leader in memory care, in part because during 2021 the facilities had a below industry average adverse behavior incidents and protected residents from the COVID-19 virus as evidenced by that fact that the number of our residents that were hospitalized because of COVID-19 was below the industry average and there have not been any resident deaths directly caused by this virus to March 31, 2022. Clearday’s MCA executives have decades of experience in the cognitive residential care treatment, including policies and procedures that protect older Americans. Our residential care communities have provided us with a proprietary and extensive understanding of the non-acute care and wellness industry and serve as our foundation for innovative care solutions, including the use of Clearday Restore, a proprietary, innovative, multi-sensory therapy tailored to the needs of those with Alzheimer’s and other forms of dementia or cognitive challenges that has contributed to decreased adverse incidents, and robotics. We may selectively acquire other residential care facilities and are negotiating the acquisition of an assisted living and an independent living facility, although there can be no assurance that we would acquire such facilities on terms that are acceptable or at all.
Clearday Labs
Clearday Labs is a focus group of Clearday senior executives and advisors supported by a team of technology consultants. We have developed Clearday Labs to continue to identify and develop modern innovative products and services to support older Americans ability to Age in the Right Place. The Clearday Labs initiatives include the development of digital and robotic services in our Longevity-tech platform. We continue our dedication to improving senior care services through ongoing innovation.
Our Strategy
Clearday’s mission is to be a leading provider to the older care consumer market by providing more engaging and more affordable alternatives that will:
| ● | Allow people to Age in the Right Place; | |
| ● | Leverage technology to enhance the customer experience and quality of product and service offerings, with a lower cost structure than is possible for legacy care service providers; | |
| ● | Require less capital investment than traditional residential care facilities and other customary care services offerings targeted to older Americans; and | |
| ● | Provide exemplary care to older Americans facing dementia and other lifestyle-limiting physical and cognitive issues. |
| 5 |
We believe that our “flywheel” is the API for Aging in Place from facilities to the home. Our “flywheel” illustrates our strategy using our Longevity-tech platform:
We have developed our strategy to provide the optimal combination of necessary solutions to provide innovative products and solutions in the longevity care market. We believe that our solutions will deliver optimal and proactive care interventions to patients based on their need, capacity to receive treatment, wherever they are most comfortable and allow us to develop the most continuous non-clinical data repository centered on aging adults.
Our strategy provides an operator-centric approach and curated solution mix that enables sustainable and scalable business in a high margin services industry. The advantages of our “flywheel” include:
| ● | Cost benefits to the user. Our robots feature computer vision capabilities that continuously track patients, looking for changes in behavior or physical ability. | |
Care Efficiency and Quality. In combination, our B.E.S.T. test and Care Pathways allow everyone to be scored and measured against a single baseline — aligning future content and recommendations.
| ||
Brand Building. Whether it’s a TV, a mobile device, or a companion robot, our Longevity-tech platform allows us to bring care to the end user, with ease of use and high-touch experience for patients and operators. | ||
| Outcomes and Retention. Our content is proven and delivers substantial benefits to people, delivering exercise, education, and entertainment that keeps people engaged. | ||
| Additional Revenue Opportunities. We can recommend innovative treatments and provide remote monitoring and virtual visits. | ||
| Inorganic Growth and Acquisitions. Each spoke of our “flywheel” has an ability to add new capabilities , including through building, buying, or partnering, that may bring in new revenue opportunities or cost take-out efficiency. | ||
Longitudinal Care Data.
| ||
| Interactions across our business flywheel aid in both real-time delivery of interactions, and, over time, build out a complete picture of a patient’s changing capacities. |
Competitive Strengths
We believe that one of our competitive advantages is our almost two decades of knowledge as operators in the eldercare market, as well as our ability to apply this understanding consistently across a diverse array of care delivery channels. Clearday believes that our competitive strengths include that:
| ● | Our PaaS structure and our Longevity-tech platform “flywheel” provide low-cost sophisticated technologies to facilities in a manner that makes it easy to deploy with the opportunities of low-cost subsidized pricing through government or sponsored programs for qualified facilities and that make deployment efficient and low cost; | |
| ● | Our executive management has extensive experience in operating long-term care assets with decades of knowledge in real estate, regulatory matters, and delivering care to customers and their families; | |
| ● | We have two decades of knowledge in treating people challenged with cognitive issues and have developed proprietary therapies and services that improve the lives of people that are challenged with dementia or other cognitive issues; | |
| ● | We have used our experiences to provide better training and a supportive caregiver experience which enables us to respond to significant industry wide staffing challenges; | |
| ● | We can quickly and efficiently develop dynamic new virtual and other service and product offerings in response to emerging market demands, including an ability to innovate new care techniques and therapies and that continue Clearday’s core strategy to offer a full spectrum of care in a manner that protects its customers from infectious diseases, including COVID-19; | |
| ● | We can offer a more diverse, flexible, and affordable care spectrum; | |
| ● | We have a proprietary design for the build out of leased space to promote a consistent look, feel, and service experience within its Clearday Clubs; | |
| ● | We have an effective sales and marketing program led by a local San Antonio team that has already sold adult day care center services prior to the opening of any of the Clearday Clubs, which services are delivered at an affiliated residential care facility; | |
| ● | Our senior executives enjoy an excellent reputation with the applicable state regulatory authorities and have decades of experience in caring for older Americans in the evolving regulatory environment; | |
| ● | Our sales and marketing efforts are led by professionals with decades of successful sales leadership; and | |
| ● | Our senior executives have a proven ability to continue care during pandemic and other emergencies, including the current COVID-19 pandemic, hurricanes, and other significant disruptions. |
Opportunity Zone Fund
Clearday sponsored an opportunity fund that provided investors with the ability to utilize the significant tax advantages of investing in designated “qualified opportunity zones,” within the meaning of the Tax Cuts and Jobs Act of 2017. This sponsored fund acquired a 3-story medical office building located in San Antonio, Texas 78217 that is located on 0.84 acres and has approximately 22,265 rentable square feet. Clearday intends to use most of the ground floor for an adult day care center and for related businesses including production of virtual programing. Some of the office space will be used for Clearday’s initial medical staff training and educational center that will further develop and offer Clearday’s Technicians of Cognitive Care Program. Space in this building is also intended to be used for Clearday’s corporate headquarters.
Competition
We operate in a highly competitive market. Our residential care facilities compete with numerous other senior living community operators, as well as companies that provide senior living services, such as home healthcare companies and other real estate-based service providers. Some of Clearday’s competitors are larger and have greater financial resources than Clearday and some of Clearday’s competitors are not-for-profit entities that have endowment income and may not face the same financial pressures as Clearday. Also, in recent years, a significant number of new senior living communities have been developed, and Clearday expects this increased development activity to continue in the future. This activity has increased competitive pressures on Clearday, particularly in the geographic markets where Clearday operates its residential care facilities. Additionally, some competitors of Clearday that operate in the same geographic market as some of Clearday’s residential care facilities have renegotiated their facility lease terms which provide a lower cost structure than Clearday. Other participants that enter the longevity residential care market will have a similar cost advantage over Clearday.
| 6 |
The adult day care market is generally a more fragmented market in the locations that Clearday has targeted and generally does not provide the same level of tech enabled care and range of cognitive and relaxation therapies that will be offered by Clearday. There are several larger firms in the adult day care markets that are targeted by Clearday and not for profit entities, as well as a range of alternatives including social centers and religious institutions that provide some, but not all the services that will be provided by Clearday.
Certain of our products and services being developed in our Clearday Labs, including the use of robotic services, also face significant competition, including by companies that may have greater resources, more widely accepted and innovative products and stronger name recognition than we do.
Clearday addressed the competition in the home and residential care market by differentiating our facilities by, among other matters, quality of services and use of innovative therapeutic services, including Clearday Restore our digital services and our development of robotic based services.
For more information on our competitive pressures that we may face and associated risks, see “Risk Factors”.
Government Regulation
Residential Care and Adult Day Care Businesses
The senior living and healthcare industries are subject to extensive, frequently changing federal, state and local laws and regulations. These laws and regulations vary by jurisdiction but may address, among other things, licensure of facilities and personnel, required staffing ratios, the authority to provide various types of medical care, zoning and physical facility requirements, food safety, emergency preparedness plan requirements, medical waste disposal requirements, government healthcare program participation requirements, fraud and abuse prohibitions, requirement relating to reimbursement for services, recordkeeping requirements, resident rights and prohibitions against abuse and neglect, confidentiality and security of personal information. Some states may also require a certificate of need before a community may be opened or the services at an existing community may be expanded. These laws and regulatory requirements impact Clearday’s day-to-day operations and could affect Clearday’s ability to expand its facilities-based businesses into new markets and to expand our services and communities in existing markets.
There are various extremely complex federal and state laws governing a wide array of referrals, relationships, and arrangements and prohibiting fraud by healthcare providers, including those in the senior living industry. Governmental agencies are devoting increasing attention and resources to anti-fraud initiatives. Pertaining to Clearday’s provision of services to veterans that are reimbursed through benefits from the U.S. Department of Veterans Affairs (the “VA”), Clearday is subject to the federal False Claims Act that prohibits anyone from presenting, or causing to be presented to the government, claims for payment that are false, fraudulent, or are for items or services that were not provided as claimed. Either the government or a private individual acting on behalf of the government may bring an action under the False Claims Act alleging that a healthcare provider has defrauded the government and seek treble damages for false claims and the payment of additional monetary civil penalties. The False Claims Act allows a private individual with knowledge of fraud to bring a claim on behalf of the federal government and earn a percentage of the federal government’s recovery. As a result of these financial incentives, these so-called “whistleblower” suits have become more frequent. Violation of the False Claims Act may also result in loss of licensure, citations, sanctions, and other criminal or civil fines and penalties, the refund of overpayments, payment suspensions, or termination of participation in Medicare and Medicaid programs, which may also trigger default under debt and lease obligations.
| 7 |
Additionally, Clearday is subject to the federal Anti-Kickback Statute (“AKS”), and certain state referral laws. The AKS makes it unlawful for any person to offer or pay (or to solicit or receive) “any remuneration. directly or indirectly, overtly or covertly, in cash or in kind” for referring or recommending for purchase any item or service which is eligible for payment under a federal healthcare program, including VA benefits. A violation of the federal AKS is a felony and may also result in criminal penalties and civil sanctions, including fines and possible exclusion from government reimbursement programs, which may also cause default under debt and lease obligations The Office of Inspector General of the Department of Health and Human Services (“OIG”) has published a number of “safe harbor” regulations that define practices that may technically violate the AKS, but will not be subject to civil or criminal enforcement action. An arrangement that fails to fit within a safe harbor is not necessarily per se illegal; the OIG will evaluate the facts and circumstances of arrangements on a case-by-case basis to determine whether the arrangements involve illegal remuneration by one party to the other. Other than VA benefits, Clearday did not generally receive reimbursement from Medicare or Medicaid or other governmental programs.
Clearday’s compliance with many of the laws and regulations cited above is determined by inspection, survey and review by the applicable authority on a periodic or other basis (e.g., complaint-based) as determined from time to time by the applicable authority. Many inspection deficiencies are resolved through a plan of corrective action relating to the facility’s cited deficiencies, but a reviewing agency may have the authority to take further action against a licensed or certified facility that could result in fines, adverse licensure action (suspension, revocation, probation), suspension or denial of admissions, loss of certification as a provider under federal and/or state reimbursement programs, or imposition of other sanctions, including criminal penalties. Challenging and appealing allegations of noncompliance with applicable laws and regulations requires the expenditure of significant legal fees and management attention. Any adverse determination concerning any of Clearday’s licenses, permits or eligibility to receive government-based reimbursement, any penalties, repayments or other sanctions, and the increasing costs of required compliance with applicable laws may trigger default under debt or lease obligations, and may negatively affect its financial condition and operations. Also, adverse findings regarding any single Clearday community may have an adverse impact on Clearday’s ability to obtain or maintain licenses at other locations and may have a material adverse effect on marketing and Clearday’s reputation. In addition, states’ Attorneys General vigorously enforce consumer protection laws as those laws relate to the senior living industry. State Medicaid Fraud and Abuse Units may also investigate assisted living and memory care communities even if the community or any of its residents do not receive federal or state funds.
Clearday’s care businesses must comply with laws designed to protect the confidentiality and security of individually identifiable information. Under the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act, or the HITECH Act, Clearday must comply with rules adopted by HHS governing the privacy, security, use and disclosure of individually identifiable information, including financial information and protected health information, or PHI, and with security rules for electronic PHI. There may be both civil monetary penalties and criminal sanctions for noncompliance with these laws. Under the HITECH Act, penalties for violation of certain provisions may be as high as $50,000 per violation for a maximum civil penalty of $1.5 million per calendar year. In January 2013, HHS released the HIPAA Omnibus Rule, or the Omnibus Rule, which went into effect in March 2013 and required compliance with most provisions by September 2013. The Omnibus Rule modified various privacy and security requirements, including modifying the standard for providing breach notices. In addition to HIPAA, many states have enacted their own security and privacy laws relating to individually identifiable information, including financial information and health information. In some states, these laws are more burdensome than HIPAA. In instances in which the state provisions are more stringent than or differ from HIPAA, providers must comply with both the applicable federal and state standards. Failure to comply with applicable federal or state standards could subject Clearday to civil sanctions and criminal penalties, which could materially and adversely affect its business, financial condition and results of operations. HIPAA enforcement efforts have increased considerably over the past few years, with HHS, through its Office for Civil Rights, entering into several multi-million dollar HIPAA settlements in recent years. Finally, the Office for Civil Rights and other regulatory bodies have become increasingly focused on cybersecurity risks, including the emerging threat of ransomware and similar cyber-attacks. The increasing sophistication of cybersecurity threats presents challenges to the entire healthcare industry.
Insurance
Litigation against senior living and healthcare companies continues to increase, and liability insurance costs continue to increase as a result. In addition, Clearday’s employee benefit costs, including health insurance and workers’ compensation insurance, generally continue to increase.
In addition to existing government regulations, Clearday is subject to numerous property and hospitality regulations applicable to the other segments of Clearday’s business of non-core assets.
| 8 |
Human Capital
Number of Employees
As of December 31, 2022, Clearday had approximately 225 employees, substantially all of which were employed for the benefit of our residential care business and our innovative care and wellness products and services. None of Clearday’s employees are expected to be subject to a collective bargaining agreement or represented by a labor union. After our termination of operations at certain of our facilities as described in “Recent Events” we have approximately 60 employees.
Human Capital Definition and Scope
Clearday defines “human capital” as the resources that may be retained and deployed by Clearday to achieve its business strategies and objectives by properly governing and managing:
| ● | Clearday’s longevity care and wellness businesses; | |
| ● | The continued innovation of Clearday’s businesses including our adult day care, digital services, robotics and related services; | |
| ● | Clearday’s general governance and administrative functions, including management of our financial capital and physical capital assets; and | |
| ● | The liquidation and other monetization of our non-core assets held for disposition. |
Clearday uses a combination of full-time employees and outsourced capabilities from independent contractors, including accounting and finance professionals.
Substantially all Clearday’s human capital are the employees of our residential care businesses. Our additional human capital includes our executive teams and those who focus on our innovative care businesses. There are several levels of human capital at MCA, including:
| ● | Senior management such as the President of MCA, each Executive Director of a facility, the head of education and training and the head of non-residential services; | |
| ● | Program staff, including those that present at Clearday’s digital adult day care service through our Longevity-tech planform; | |
| ● | Senior management and staff at Memory Care America residential facilities, including: |
| ○ | Nursing professionals such as Registered Nurses, Licensed Vocational Nurses, and Licensed Practical Nurses; | |
| ○ | Certified Nursing Assistants and Certified Medication Aids | |
| ○ | Resident Assistants; | |
| ○ | Home Health Aids; | |
| ○ | Certified Medication Aids; and | |
| ○ | Other staff including housekeeping and food and beverage. |
Human Capital Policy
Clearday’s human capital policy is to promote a culture of mutual respect that is aligned and promotes the governance and management of Clearday’s business strategies and objectives with substantially all the senior executive functions performed by its employees with the additional use of outsourced capabilities primarily when such consultants or professionals have significant and required expertise or when such use is expected to be more efficient than full-time employees. Clearday believes that certain independent contractors will continue to be important to innovate Clearday’s business, including Thinktiv, our consultant that has been retained to provide services, including market and competitive research, develop Clearday’s Longevity-tech planform and Clearday Club business models. Clearday will also retain other outside counsel and other professionals from time to time as we determine appropriate.
Material Changes in Human Capital
Clearday has retained professionals to strengthen its financial, legal and administrative capabilities, including professionals responsible for timely reporting as a public company under the Securities and Exchange Act of 1934, as amended. From and after the fourth quarter of 2021, Clearday has increased its human capital in its accounting and finance department to reduce our reliance on outside independent contractors and financial consultants and reduce our administrative costs.
| 9 |
Clearday has experienced an amount of executive turnover in its residential care business which Clearday believes is customary in the industry. There has been turnover in our executive and financial reporting. Clearday believes that its turnover in our residential care business is driven primarily by compensation available by other employers, including other residential care facilities, and the personal mental demands of providing the highest quality of care with dedication to protecting the most vulnerable demographic, including those suffering from dementia and other cognitive or physical limitations.
Diversity
Clearday is committed to expanding the diversity of its human capital. In our residential care business, the management team, including its President, is more than 60% women and more than 15% are minority. Our 4 independent Board directors include one woman, one minority and one elder American.
Clearday’s policies do not permit intolerant statements or actions, including those that are demeaning or prejudicial to persons of any nationality, culture, ethnicity, race, sexual orientation, gender or gender identification, age, cognitive or physical limitation or other social class. Violations or allegations of any violations may be directed to the Human Resources Executive, currently Clearday’s Chief Financial Officer, or Clearday’s Chairman for appropriate investigation and resolution by appropriate action that may include termination for cause. Clearday’s policy is to enable the continued development and advancement of its employees through education, including Clearday’s Technicians of Cognitive Care program and reimbursement for continued professional education. In addition, the Company offers sales and marketing seminars, including the seminars and coaching provided personally by Clearday’s CEO. Of our residential care business’ 5 Executive Director positions and its President, 3 (60%) of these positions were filled by employee promotions.
Human Capital Evaluation
Clearday considers numerous factors in determining the compensation for, and the amount (number) of, its human capital that is required for the proper administration and promotion of its business strategies and objectives, including Clearday’s ability to promote Clearday’s vision for its services through the following set of key principles which we refer to as The Clearday Way:
Provide Clearday’s customers with safe, positive community-based environments that increase their independence, social engagement, and overall well-being.
Deliver personalized programming and therapies that prolong Clearday’s members’ ability to live at home, rather than transitioning to full-time residential care.
Give Clearday’s members’ families the comfort of knowing their loved ones are enjoying their days with Clearday, whether at home, in a daily care Club, or in one of Clearday’s living centers.
Reduce economic anxiety for Clearday’s members and their families by offering innovative new care options at a fraction of the price of residential care.
Create innovative work environments, empowering development programs, and a purpose-driven culture that attracts and retains the highest quality caregiving staff.
Compensation includes wages, promotions, salary increases and bonus compensation and equity-based compensation that is believed by the Clearday Board to promote the human capital processes and goals that are summarized above, in addition to customary industry metrics.
Clearday evaluates its human capital using several qualitative metrics and with customary employee performance metrics, such as on-time performance and achievement of applicable assigned tasks. Clearday’s senior management in the residential and non-residential care business, such as Memory Care America and adult day care, also evaluate human capital based on an individual’s dignity and respect for the residents and clients and their dedication to energize and improve a resident’s and client’s quality of life, and adding some fun and enjoyment in their day, as well as their compliance with Clearday’s infectious control policies.
Certain Corporate Executive Officers
Clearday has a smaller number of Clearday executive officers that focus their time and attention to general administration and financial capital matters, including Clearday’s Chief Executive Officer, Chief Operating Officer, and its General Counsel and other executive officers including our Executive Vice President—Director of Real Estate Operations, and the President of our residential care business (the “corporate executives”). Compensation for the corporate executives is determined by the Clearday Board. In determining the compensation for each corporate executive, Clearday considers, among other things, such officer’s achievement of material business strategies and objectives, including their:
| ● | Accomplishments during the year compared to annual objectives; | |
| ● | Support to “line” management in operations and innovations and other contributions to Clearday’s human capital to achieve Clearday’s business strategies and objectives; | |
| ● | Contribution and improvement to Clearday’s human capital culture; | |
| ● | Identification and mitigation of risks to Clearday, its businesses and people; | |
| ● | Ability for future development and undertaking or managing additional tasks; | |
| ● | Background, training, education and experience; and | |
| ● | Compensation of similarly situated executives in the San Antonio, Texas executive employment market. |
| 10 |
Executive Compensation Philosophy and Process
Clearday’s compensation has been established under the policies of the Clearday Board and is designed to help Clearday achieve its business strategies and objectives, which include increasing, on a long-term basis, the value of Clearday by improving Clearday’s financial and operating performance, improving Clearday’s competitive position within its industry, innovating and improving Clearday’s care and wellness services and products and managing risks facing Clearday.
Individual performance is an important factor in determining each element of compensation. Clearday’s Board determines, and after this offering, Clearday’s Compensation Committee will determine:
| ● | The executive officers that are considered a corporate executive; | |
| ● | The cash annual and bonus compensation of Clearday’s corporate executives; | |
| ● | The amount and terms of equity incentive compensation of Clearday’s corporate executives; and | |
| ● | All other compensation and benefits of Clearday’s corporate executives. |
There is no formulaic approach to such determinations and such determinations are made by the Clearday Board (and will be made by the Compensation Committee) in their discretion. In exercising such discretion, the Clearday Board (or Compensation Committee) may rely on the benefit of reports and information provided by counsel, accountants and other professionals, including compensation consultants.
The compensation is intended to further align the interests of the corporate executives with those of Clearday’s stockholders. Equity compensation is used to foster such alignment. Additionally, cash bonuses may be used when Clearday has achieved net cash flow that is not reinvested in the businesses or used for distributions.
The primary factor considered by the Compensation Committee and the Board when determining discretionary compensation for the corporate executive is the historical cash and equity compensation paid to such individual and to the other corporate executives with similar specific areas of expertise and value to Clearday, and the likelihood that the Clearday could find a suitable replacement on a timely and cost-effective basis.
In addition to the consideration of the various factors described in the preceding paragraphs, the Clearday Board considers (and Compensation Committee will consider) available compensation data for similarly situated companies or that possess size or other characteristics that are similar to Clearday.
Clearday Compensation philosophy and procedures are intended to limit incentives for management to take excessive risk for short term benefit.
Board Members
Clearday’s human capital policies include the policies regarding the nomination of members of the Clearday Board with identified particular qualifications, attributes, skills and experience that are important to be represented on the Clearday Board as a whole and enable proper governance and oversight aligned with stockholder interests. Some of the factors and related qualifications, attributes, skills and experience that Clearday believes should be represented are:
| Factor | Qualifications, Attributes, Skills and Experience | ||
| Understanding and overseeing the various risks determining appropriate policies and procedures to effectively manage those risks and determining the effectiveness of such policies and procedures. | ● | Risk oversight/management expertise. | |
| ● | Service on other public company boards and committees. | ||
| ● | Operating business experience. | ||
| Knowledge of the healthcare and longevity care and wellness industries and related factors impacting those industries. | ● | Understanding of, and work experience in, such industries. | |
| ● | Familiarity with service-based industries. | ||
| ● | Experience in developing disruptive and innovative services and products that leverage technology. | ||
| Ability to evaluate strategic direction considering current industry policy trends and expected regulatory changes. | ● | Experience at a strategic or policymaking level in a business, government, non-profit or academic organization of high standing. | |
| ● | Commitment to serve on the Clearday Board over a period of years in order to develop knowledge about Clearday’s business. | ||
| ● | Understanding of healthcare policy, trends and regulations and their impact on Clearday’s business and strategic plans. | ||
| ● | Understanding of government regulatory processes. | ||
| 11 |
| Factor | Qualifications, Attributes, Skills and Experience | ||
| Understanding of complex financial transactions. | ● ● ● ● ● ● ● ● |
High level of financial literacy. High level of education and analytic capabilities. Familiarity with healthcare regulation trends and activity. Management/leadership experience. Knowledge of Clearday’s historical business activities. Familiarity with public capital markets. Work experience. Ability to work with counsel and financial professionals. | |
| Ability to meet frequently and, at times, on short notice. | ●
|
Sufficient time and availability to devote to Board and committee matters. | |
| ● | Ability to assess if sufficient data and information has been made available for an informed and prudent decision. | ||
| Diversity that can assess and integrate a range of views. | ● | Diversity. | |
| Independence from management. | ● | Independence under applicable standards, including SEC and applicable exchange standards. | |
Facilities
During 2022, we operated four residential care communities and one adult day care facility:
| Facility * | Location | |
| Memory Care of Naples* | Naples, Florida | |
| Memory Care of Westover Hills^ | San Antonio, Texas | |
| Memory Care of Little Rock at Good Shepherd^ | Little Rock, Arkansas | |
| Memory Care of New Braunfels^ | New Braunfels, Texas | |
| Primrose Adult Daycare# | San Antonio, Texas |
* The Memory Care of Naples facility is owned.
^ Leased facility. We have terminated each of these leases. See “Recent Events.”
# Our adult day care center is in San Antonio, Texas in a leased facility.
We also own our headquarters building located at 8800 Village Drive, San Antonio, Texas. This building is a 3-story medical office building located on 0.84 acres and has approximately 22,265 rentable square feet. We intend to use most of the ground floor for an adult day care center and a retail location for products. Some of the office space is used for Clearday’s executive offices, its educational and production centers that develop content for our Longevity-tech planform.
Material Changes in our Business
We were incorporated in Delaware on May 11, 1987. We engaged in businesses that focused on developing and commercializing high temperature superconductor and certain cryocooler technologies, which we continue to use in our development of a cryogenic air quality system.
On September 9, 2021, we closed a merger (the “AIU Merger”) with Allied Integral United, Inc. (“AIU”). The AIU Merger was described in the AIU Merger Registration Statement and our Form 10-K for the annual period ending December 31, 2021. In 2022 and 2023, we accelerated the development of our purpose-built Longevity-tech platform for the 170 million Americans turning 50 by 2030 and shifted our business strategy. Our Longevity-tech platform intentionally moves our focus from a facility-driven real estate business to a healthcare technologies business that is designed to capture the massive unmet senior care need. We believe that the currently available longevity-tech solutions do not address this significant market and that we are able to modernize the nearly 40,000 U.S. daily care, skilled nursing, and long-term care facilities.
At the end of the first quarter of 2023, we entered into agreements to exit from three of our four residential care facilities and limit our financial investment in the capital-intensive residential memory care businesses and terminate our leases (“MC Facility Leases”) of these three facilities (“MC Facilities”). On April 5, 2023, we entered into a merger agreement (“Viveon Merger Agreement”) with Viveon Health Acquisition Corp., a Delaware corporation (“Viveon”), that is a special purpose acquisition corporation or SPAC and that has its shares of common stock listed on the NYSE American exchange. See “Recent Events.”
COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19, which spread throughout the U.S. and the world, as a pandemic and has had a significant impact on the global economy, resulting in rapidly changing market and economic conditions. National and local governments around the world instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain non-essential businesses, curfews, shelter-in-place orders and recommendations to practice social distancing. The governmental response includes additional protocols for the health and safety of residents and staff in the Company’s facilities. The outbreak and associated restrictions on travel that have been implemented have had a material adverse impact on the Company’s business and cash flow from operations, similar to many businesses. We have generally been able to conduct our businesses with limited adverse effects resulting from COVID-19. However, there may be new strains of COVID and the state health regulations regarding elder care facilities continue to restrict operations in the event COVID is present in a residential care or adult day care facility. For example, during December 2022, we suspended operations in our San Antonio Adult Daycare center for a couple of weeks in response to a COVID-19 outbreak and there continues an extensive regulatory environment regarding COVID-19, including requirements for isolation of residents that are infected which may continue to increase operating costs.
Other Assets and Investments
We have sold certain assets that are not related to our care-focused business. Such sales include the sale of hospitality assets and other real property assets, as described in this Report under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| 12 |
Our Proprietary Technology
We have patents related to our Sapphire Cryocooler technology: In July 2017, EU patent 2188495 (08797906.8) was granted, this patent follows the U.S. Patent granted by U.S. 8,607,560. This patent is focused on METHOD FOR CENTERING RECIPROCATING BODIES AND STRUCTURES MANUFACTURED THEREWITH, related to our Sapphire Cryocooler. We have used the Sapphire Cryocooler and related technologies as the basis for the development of our cryogenic air quality system.
We enter into confidentiality and non-disclosure agreements with our employees, suppliers and consultants to the extent that we believe it is appropriate to protect our proprietary information. Our technologies that enable our digital services, including our Longevity-tech planform, are not subject to patent protection. We have registered the mark Clearday with the United States Patent office for use in our businesses.
Government Contracts
We do not have any material government contracts, although we may seek government contracts for our cryo-pure air system. We receive reimbursements to veterans under a program by the United States Department of Veterans Affairs (VA) which we intend to expand during 2023.
Manufacturing
We produce content for our Longevity-tech planform and related digital services primarily from our production facilities located at 8800 Village Drive, Suite 106, San Antonio, TX 78217.
Backlog
We had no commercial backlog at December 31, 2022 or December 31, 2021.
Research and Development
We have not spent any amounts on research and development during 2022 or 2021. We have incurred expenses that are related to developing our innovative services and products, including the content and technologies for our Longevity-tech planform. These are not classified as research and development expenses under GAAP.
Environmental Matters
Under various federal, state, and local environmental laws, a current or previous owner or operator of real property, such as us, may be held liable in certain circumstances for the costs of investigation, removal, or remediation of certain hazardous or toxic substances, including, among others, petroleum and materials containing asbestos, that could be located on, in, at, or under a property, regardless of how such materials came to be located there. Additionally, such an owner or operator of real property may incur costs relating to the release of hazardous or toxic substances, including government fines and payments for personal injuries or damage to adjacent property. The cost of any required investigation, remediation, removal, mitigation, compliance, fines, or personal or property damages and our liability therefore could exceed the property’s value and/or our assets’ value. The presence of such substances, or the failure to properly dispose of or remediate the damage caused by such substances, may adversely affect our ability to sell such property, to attract additional residents, retain existing residents, to borrow using such property as collateral, or to develop or redevelop such property. Such laws impose liability for investigation, remediation, removal, and mitigation costs on persons who disposed of or arranged for the disposal of hazardous substances at third-party sites. Such laws and regulations often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence, release, or disposal of such substances as well as without regard to whether such release or disposal followed law at the time it occurred. Moreover, the imposition of such liability upon us could be joint and several, which means we could be required to pay for the cost of cleaning up contamination caused by others who have become insolvent or otherwise judgment proof. We do not believe that we have incurred such liabilities that would have a material adverse effect on our business, financial condition, results of operations, and cash flow.
Our operations are subject to regulation under various federal, state, and local environmental laws, including those relating to: the handling, storage, transportation, treatment, and disposal of medical waste products generated at our communities; identification and warning of the presence of asbestos-containing materials in buildings, as well as removal of such materials; the presence of other substances in the indoor environment; and protection of the environment and natural resources in connection with development or construction of our properties.
| 13 |
Some of our communities generate infectious or other hazardous medical waste due to the illness or physical condition of the residents, including, for example, blood-contaminated bandages, swabs and other medical waste products, and incontinence products of those residents diagnosed with an infectious disease. The management of infectious medical waste, including its handling, storage, transportation, treatment, and disposal, is subject to regulation under various federal, state, and local environmental laws. These environmental laws set forth the management requirements for such waste, as well as related permit, record-keeping, notice, and reporting obligations. Our communities’ engagement of waste management companies for the proper disposal of all infectious medical waste does not immunize us from alleged violations of such medical waste laws for operations for which we are responsible even if carried out by such waste management companies, nor does it immunize us from third-party claims for the cost to cleanup disposal sites at which such wastes have been disposed. Any finding that we are not in compliance with environmental laws could adversely affect our business, financial condition, results of operations, and cash flow.
Federal regulations require building owners and those exercising control over a building’s management to identify and warn, via signs and labels, their employees and certain other employers operating in the building of potential hazards posed by workplace exposure to installed asbestos-containing materials and potential asbestos-containing materials in their buildings. The regulations also set forth employee training, record-keeping requirements, and sampling protocols pertaining to asbestos-containing materials and potential asbestos-containing materials. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to asbestos-containing materials and potential asbestos-containing materials. The regulations may affect the value of a building containing asbestos-containing materials and potential asbestos-containing materials in which we have invested. Federal, state, and local laws and regulations also govern the removal, encapsulation, disturbance, handling, and/or disposal of asbestos-containing materials and potential asbestos-containing materials when such materials are in poor condition or in the event of construction, remodeling, renovation, or demolition of a building. Such laws may impose liability for improper handling or a release to the environment of asbestos-containing materials and potential asbestos-containing materials and may provide for fines to, and for third parties to seek recovery from, owners or operators of real properties for personal injury or improper work exposure associated with asbestos-containing materials and potential asbestos-containing materials.
The presence of mold, lead-based paint, contaminants in drinking water, radon, and/or other substances at any of the communities we own or may acquire may lead to the incurrence of costs for remediation, mitigation, or the implementation of an operations and maintenance plan. Furthermore, the presence of mold, lead-based paint, contaminants in drinking water, radon, and/or other substances at any of the communities we own or may acquire may present a risk that third parties will seek recovery from the owners, operators, or tenants of such properties for personal injury or property damage. In some circumstances, areas affected by mold may be unusable for periods of time for repairs, and even after successful remediation, the known prior presence of extensive mold could adversely affect the ability of a community to retain or attract residents and could adversely affect a community’s market value.
We believe that we are in material compliance with applicable environmental laws. We are unable to predict the future course of federal, state, and local environmental regulation and legislation. Changes in the environmental regulatory framework (including legislative or regulatory efforts designed to address climate change) could have a material adverse effect on our business. Because environmental laws vary from state to state, expansion of our operations to states where we do not currently operate may subject us to additional restrictions on the manner in which we operate our communities. We did not make any material capital expenditures in connection with environmental, health, and safety laws, ordinances and regulations in 2022 or 2021.
Corporate Information
Our principal executive offices are located at 8800 Village Drive, San Antonio, TX 78217 and our telephone number is (210) 451-0839. We were incorporated in Delaware on May 11, 1987. Additional information about us is available on our website at www.myclearday.com. The information on our web site is not incorporated herein by reference.
| ITEM 1A. | RISK FACTORS |
The following section includes some of the material factors that may adversely affect our business and operations. This is not an exhaustive list, and additional factors could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. This discussion of risk factors includes many forward-looking statements. For cautions about relying on such forward-looking statements, please refer to the section entitled “Forward Looking Statements” at the beginning of this Report immediately prior to Item 1.
Risks Related to Our Business and Industry
We have a history of losses and have received a going concern opinion from our auditors.
We have experienced significant net losses and negative cash flows from operations. In 2022, we incurred a net loss of approximately $14.4 million and had negative cash flows from operations of approximately $4.7 million. In 2021, we incurred a net loss of $19.5 million and had negative cash flows from operations of $2.6 million. Our independent registered public accounting firm has included in its audit reports an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. We do not have sufficient cash resources from the net cash flows of operations from our current businesses to sustain our operations for the next twelve months and will rely on the continued sale of non-core assets, tax credits and related amounts, and raising capital through the sale of our securities.
| 14 |
Our ability to protect our patents, service marks or other proprietary rights is uncertain, exposing us to possible losses of competitive advantage.
Our efforts to protect our proprietary rights may not succeed in preventing infringement by others or ensure that these rights will provide us with a competitive advantage. Pending patent applications by us or any of our joint venturers may not result in issued patents and the validity of issued patents may be subject to challenge. Third parties may also be able to design around the patented aspects of the products. Additionally, certain of the issued patents and patent applications are owned jointly with third parties. Because any owner or co-owner of a patent can license its rights under jointly owned patents or applications, inventions made by us jointly with others are not subject to our exclusive control. Any of these possible events could result in losses of competitive advantage.
Intellectual property infringement claims against us could materially harm the results of operations.
Our products and products that we intend to provide such as robotic technologies, incorporate several technologies, including the technologies related to the Sapphire Cryocooler and the cryogenic air quality system. Our patent positions and that of our joint venturers are uncertain and there is significant risk that others, including our competitors or potential competitors, have obtained or will obtain patents relating to our products or technologies or products or technologies planned to be introduced by us.
We believe that patents may be or have been issued, or applications may be pending, claiming various compositions of matter used in our products and products that we intend to provide. We or our third-party joint venturers may need to secure one or more licenses for these patents. There can be no assurances that such licenses could be obtained on commercially reasonable terms, or at all. We or our third-party joint venturers may be required to expend significant resources to develop alternatives that would not infringe such patents or to obtain licenses to the related technology. We or our third-party joint venturers may not be able to successfully design around these patents or obtain licenses to them and may have to defend ourselves at substantial cost against allegations of infringement of third-party patents or other rights to intellectual property. In those circumstances, we could face significant liabilities and be forced to cease the use of key technology.
Other parties may have the right to utilize technology important to our business.
We and our third-party joint venturers utilize certain intellectual property rights under non-exclusive licenses or have granted to others the right to utilize certain intellectual property rights licensed from a third party. Because we and our third-party joint venturers may not have the exclusive rights to utilize such intellectual property, other parties may be able to compete with us, which may harm our business.
The recent unprecedented events related to the COVID-19 pandemic and the Russo-Ukrainian War have caused significant market disruptions and may have longer-term effects that Clearday cannot predict.
The recent unprecedented events related to the COVID-19 pandemic and the Russo-Ukrainian War as well as global security issues generally have caused significant market disruptions and may have longer-term effects that Clearday cannot predict. The equity and other market professionals continue to assess the consequences of such events and the extent and effectiveness of government responses, the responses of the Federal Reserve Bank and other governmental and non-governmental organizations cannot be predicted.
The residents of Clearday’s residential care communities and the clients, and expected clients, of our Longevity-tech planform and Clearday adult day care programs are primarily older individuals with pre-existing conditions, including conditions that significantly compromise their immunity. The additional procedures undertaken by our residential care and the adult day care businesses will likely result in reduced operating cash flow and profit margins. Although Clearday has procedures that address infectious diseases and contamination in a community environment, Clearday is not able to provide assurance that the communities will not be significant affected, including widespread contagion that could result in a suspension or closing of a facility. Additionally, state or federal regulatory authorities may require, and industry groups may provide, additional measures that could limit the number of individuals that may be treated at a facility, require additional staff or employees or other measures that may require significant investment or operating cost. The additional costs have primarily resulted from regulatory requirements to increase staff and provide quarantine areas. Additionally, during the initial stage of the COVID-19 pandemic, admissions to Clearday’s residential care facilities were suspended and adult day care centers were closed.
During such occasions, Clearday may experience a decline in clients. Further, depending on the severity of any occurrence, Clearday may be required to incur costs to identify, contain and remedy the impacts of those occurrences at our residential care communities or adult day care facilities. As a result, these occurrences could significantly adversely affect the results of operations.
The adult day care business has greater risks with respect to COVID-19 and other pandemics due to, among other reasons, that appropriate regulatory agencies may close such businesses, limit the capacity of such businesses, or require additional procedures or capital expenditures designed to protect customers that are costly. During the COVID-19 pandemic, many states closed adult day care centers for a period.
| 15 |
The Russo-Ukrainian War has caused, or has contributed to, significant inflation, increased energy costs and worsened the supply chain disruption in the U.S., each of which has contributed to increased costs for our operations which would worsen our operating results. We are not able to determine the extent or the expected period for such disruptions or if any other and similar disruptions would occur or may have greater adverse effect on our business or the U.S. economy in general.
The additional procedures and precautions undertaken by adult day care businesses in response to COVID-19 will likely result in reduced operating cash flow and profit margins.
Although Clearday has procedures that address infectious diseases and contamination in a community environment, Clearday is not able to provide assurance that the communities will not be significantly affected, including widespread contagion that could result in suspending or closing a facility. Depending on the severity of any occurrence, Clearday may be required to incur costs to identify, contain and remedy the impacts of those occurrences at residential care communities and our adult day care facilities.
Additionally, state or federal regulatory authorities may require, industry groups may provide or Clearday may otherwise determine that it would be prudent, to implement certain additional measures and/or quarantine procedures that may require significant investment and/or operating costs, such measures may include limiting the number of individuals that may be treated at a facility while requiring additional staff to manage treatment during the COVID-19 pandemic. During this time, Clearday may also experience a decline in occupancy due to residents terminating their agreements due to the uncertainty of COVID-19 and its effects on adult day care businesses and residential care facilities. Such investments and increased costs may adversely affect Clearday’s operations. The extent and duration of the impact of the COVID-19 pandemic on Clearday’s overall business is uncertain, and our ability to raise capital could be impaired.
Any other severe cold and flu season, epidemics or any other widespread illnesses could adversely affect the occupancy of Clearday’s residential care communities and facilities.
The revenues of Clearday will be dependent in large part on the occupancy levels at our residential care communities and the members of the Clearday Clubs and any other adult day care facility or other non-acute care and wellness center that will be owned or operated by Clearday. Even if the disruption to the markets and facilities are not as pronounced as during the COVID-19 pandemic, there could be significant reduction in Clearday’s revenues and there could be government or other regulatory intervention that materially increase costs, which would likely materially reduce the operating results of Clearday.
Clearday’s non-acute care and wellness business has significant concentration in industry and geographic areas which exposes Clearday to changes in market conditions in this industry and in those areas.
As of December 31, 2022, we had 4 residential care facilities are in the Little Rock Arkansas area (1), Naples, Florida (1), and the San Antonio / Austin area of Texas (2) and 1 adult day care center in San Antonio, Texas. In March and April of 2023, we entered into certain agreements to cease our operations and terminate our leases with respect to the three residential care facilities in Little Rock Arkansas and Texas as we moved our business strategy to a Longevity-tech platform. See “Recent Events.” We also expect to grow our adult day care business primarily in specified markets, in Texas, initially in Central Texas. The services and products in our Longevity-tech planform are marketed nationally and, to a lesser extent, to certain international markets. Revenues from such services and products are not, as of the date of this Report, significant compared to the residential care and adult day care facility revenues during 2022. Accordingly, we will continue to have a high concentration in select geographic markets. Additionally, our business will primarily be focused on the non-acute care businesses. As a result of this industry and geographic concentrations, the conditions affecting older Americans and the of local economies and real estate markets, changes in governmental rules and regulations, particularly with respect to senior citizens, acts of nature and other factors that may result in a decrease in demand for our services in these areas could have an adverse effect on our revenues, results of operations and cash flow. In addition, we will be particularly susceptible to revenue loss, cost increases or damage caused by severe weather conditions or natural disasters such as hurricanes, wildfires, earthquakes or tornadoes in those areas.
Circumstances that adversely affect the ability of older adults or their families to pay Clearday for our adult day care services could cause our revenues and results of operations to decline.
Clearday expects that payment for our adult day care services will be (1) private pay and not rely on government benefits, such as Medicare and Medicaid, which are generally not available for such services, and (2) benefits or payments available to veterans through the United States Department of Veterans Affairs. Clearday has currently priced the basic service fee for our adult day care centers at a monthly amount that is generally expected to be less than the monthly payment benefits to retirees from the Social Security Administration and Clearday expects that older adults that live with family members will have sufficient funds to pay such service fees and their other household expenses. There can be no assurance that the expected service fee by Clearday will be at an amount that can be afforded by Clearday’s target market for our Clearday Clubs. Economic downturns, higher levels of unemployment among family members, lower levels of consumer confidence, stock market volatility, increased inflation and/or changes in demographics, including the unprecedented effects of the COVID-19 pandemic, could adversely affect the ability of older adults to afford Clearday’s expected adult day care service fees and could result in decreased fees and revenues resulting in a decline of Clearday’s estimated operating results as many of the operating costs for an adult day care center will not vary in relation to a decrease in club members or revenues.
| 16 |
Clearday may not be able to operate our business or implement the business strategies.
Clearday intends to develop and expand new businesses including in the areas of home care services and products and provide services or otherwise have revenue from related services which may include retail sales of products including products that incorporate the technology of our Sapphire Cryocooler, robotics and provide other care services. Clearday created Clearday Labs to evaluate such opportunities and other strategies or business opportunities that Clearday believes would be complimentary to our existing businesses, specifically, our residential care facilities and the digital service offering, and where Clearday may benefit from certain synergies in management and leverage of assets. There can be no assurance, however, that Clearday will be able to implement our business strategy in a manner that realizes any of our intended benefits, including that Clearday will be able to acquire, internally develop or enter into strategic alliances for intended or prospective business lines.
Clearday’s planned business and growth strategy may not yield anticipated returns, may result in disruptions to the business of, may strain management resources and/or may be dilutive to Clearday’s stockholders.
Clearday’s business and growth strategies involve the development (by organic growth or, to a lesser extent, through acquisitions and joint ventures) of businesses that are focused on tech-enabled non-acute care and wellness. In evaluating Clearday’s business opportunities, Clearday will make certain assumptions regarding the expected future performance and prospects. However, newly acquired businesses or investments in businesses, or strategic alliances, may fail to perform as expected, and Clearday may not be able to manage those businesses in a manner that meets our expectations. Clearday’s acquisition activities may be subject to the following risks:
| ● | Clearday businesses that are acquired or conducted through joint ventures do not realize the synergies that it expects and require substantially greater investment than it anticipated; | |
| ● | Clearday may acquire or invest in businesses that realize net cash losses initially and/or for a period that is longer than Clearday anticipated; | |
| ● | If Clearday finances acquisitions or strategic alliances by incurring debt, Clearday’s cash flow may be insufficient to meet the required principal and interest payments; | |
| ● | Clearday may be unable to quickly and efficiently integrate new acquisitions or strategic alliances, and as a result Clearday’s results of operations and financial condition could be adversely affected; | |
| ● | Operating expenses of an acquired business or a strategic alliance may exceed budgeted amounts; | |
| ● | Management may be diverted from operations; and | |
| ● | Clearday may be required to have management teams that are not proven or that do not, for any number of reasons, perform as expected. |
If Clearday cannot operate our businesses or strategic alliances to meet our financial expectations, Clearday’s financial condition, results of operations, cash flow and per share trading price our Common Stock could be adversely affected.
Clearday may use its securities and/or the securities our subsidiaries as consideration in connection with our acquisition strategy which could result in significant dilution to the relative ownership interest of holders of our capital stock prior to such acquisitions.
In addition, it is likely that Clearday will use its or a subsidiary’s securities as consideration, in part or whole, for the purchase of acquired businesses as part of our asset and business acquisition strategy. Such securities may carry rights or preferences different from or superior to those of Clearday’s common stock. Moreover, if such securities include Clearday’s common stock or securities senior to or Pari passu to or convertible or exchangeable into shares of Clearday’s common stock, the relative ownership interest of the holders of the Clearday’s capital stock would be subject to dilution.
Clearday’s strategy includes businesses that are in development or early stages and such strategies and businesses include additional venture stage risks and there is no assurance that Clearday may be able to develop our businesses organically or through acquisitions.
A fundamental strategy of Clearday is the continued development of our Longevity-tech planform, Clearday Clubs, as well as related businesses, including other products and services we expect to develop in our Clearday Labs. The products and services in our Longevity-tech planform do not have any material revenues as of the date of this Report. Clearday Clubs has opened its initial location by the acquisition of an adult day care center in San Antonio, Texas. Clearday’s ability to successfully execute future development in accordance with our business plan, or at all, will be impacted by a number of factors, including the ability to sell our remaining non-core assets, the availability of additional financing, including additional equity financing, on terms acceptable to Clearday, the availability of government programs and reimbursements, market trends, the ability to identify and execute business opportunities, including acquisitions that meet the parameters of the Clearday business plan, and increased competition for sites for the expansion opportunities or acquisitions. The development and acquisitions of future businesses may result in unforeseen operating difficulties and may require additional financial resources and attention from management. Failure to identify suitable development or acquisition businesses, effectively execute the Clearday business strategy or operating difficulties of businesses that Clearday may acquire in the future could have an adverse effect on Clearday’s financial condition, results of operations, cash flows and liquidity.
| 17 |
Clearday will require additional capital and there is no assurance that any debt or equity financing will be available on acceptable terms, if at all.
To the extent that Clearday develops its business through financing, including additional equity financing, there cannot be assurance that financing will be available on acceptable terms, if at all, or that Clearday may be able to satisfy the conditions precedent required to secure borrowings or utilize credit facilities, which could reduce the number, or alter the type, of investments that Clearday would make otherwise and the ability for it to expand its businesses. Any such limitation on such financing or sales of our remaining non-core assets may reduce income. To the extent that financing proves to be unavailable when needed, Clearday may also be compelled to modify our business strategy. Any failure to obtain financing or realize the sale of our remaining non-core assets or other assets may have a material adverse effect on the continued development or growth of Clearday’s business. We do not have any binding agreement with an investment banker to provide additional capital. There is no assurance that the public market conditions, the market acceptance of Clearday, the price and volume of our common stock and other factors, will enable any such offering will be consummated on terms acceptable to Clearday or that AGP or any other investment bank will then decide that it would then manage or participate in any such offering.
If Clearday fails to identify and quickly respond to changes and trends in non-acute care and wellness preferences, our business, financial condition, results of operations and prospects will be adversely impacted.
Clearday expects to provide services to the non-acute care and wellness industry and expects the products and services to be subject to dynamic changes. The needs and preferences of older adults have generally changed over the past several years, including preferences to reside in their homes longer or permanently, as well as changes in services and offerings, including delivery of home healthcare services, utilization of outpatient rehabilitation services and services that address their increasing desire to maintain active lifestyles. If Clearday fails to identify such changes and quickly and successfully respond to such changes to deliver accepted products and services, then competitors will be able to successfully penetrate the markets that Clearday will operate and Clearday will not be able to successfully grow or maintain our businesses, which would adversely affect our business, financial condition, results of operations and prospects.
Our debt leverage and financing arrangements that we may enter into may, under certain circumstances, contain restrictions and limitations that could impact our ability to operate our business.
Clearday has incurred its long term and other debt, primarily, in connection with the financing of (1) long term assets that are now held for sale, and (2) the financing of the residential care facility in Naples, Florida and its operations and (3) other loans that have funded our operations. The indebtedness of Clearday may have the effect, among other things, of reducing the flexibility of Clearday to respond to changing business and economic conditions, requiring us to use increased amounts of cash flow to service indebtedness and increasing our borrowing costs.
The remaining non-care assets may not have the net realizable value that is estimated.
Clearday intends to sell or otherwise dispose of our remaining non-care assets to raise additional funds for our tech-enabled non-acute care businesses. We do not expect to make additional investments in any of these remaining assets to be able to reposition the asset to achieve their highest or best use or otherwise achieve a better value. Further, certain of our remaining non-core assets may require additional investment to maintain, such as replacement or repairs, and deferring maintenance and other related costs could decrease the net realizable value of our remaining non-core assets. There can be no assurance that the value of our remaining non-core assets will be able to be sold for the net realizable value that is estimated or the amount that such assets are in the financial statements of Clearday.
Operators of senior care facilities must comply with the rules and regulations of governmental reimbursement programs and certification requirements, fraud and abuse regulations and are subject to new legislative developments.
Our care businesses are highly regulated by federal, state and local licensing requirements, facility inspections, reimbursement policies, regulations concerning capital and other expenditures, certification requirements and other laws, regulations and rules. Any failure to comply with such laws, requirements and regulations could affect Clearday’s ability to operate the facilities that Clearday owns or operates. Healthcare operators are subject to federal and state laws and regulations that govern financial and other arrangements between healthcare providers. These laws prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products and services. They also require compliance with a variety of safety, health, staffing and other requirements relating to the design and conditions of the licensed facility and quality of care provided.
| 18 |
These regulations may also enable the regulatory agency to place liens on properties. Possible sanctions for violation of these laws and regulations include loss of licensure or certification, the imposition of civil monetary and criminal penalties, and potential exclusion from the Medicare and Medicaid programs. The failure of Clearday to comply with these rules or regulations could have an adverse effect on our financial condition or results of operations.
In addition, this area of the law currently is subject to intense scrutiny. Additional laws and regulations may be enacted or adopted that could require changes in the design of the properties and its joint venture’s operations and thus increase the costs of these operations.
Private third-party payers continue to try to reduce healthcare costs.
Private third-party payers such as insurance companies continue their efforts to control healthcare costs through direct contracts with healthcare providers, increased utilization review practices and greater enrollment in managed care programs and preferred provider organizations. These third-party payers increasingly demand discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk. These efforts of third-party payers to limit the amount of payments that Clearday or others may receive for healthcare services could adversely affect Clearday and would adversely affect Clearday even if such insurance policies do not cover residential or non-residential care facilities that Clearday will operate as the total household cash flow would be reduced and there would be less funds available for Clearday’s services. At the same time, as a result of competitive pressures, Clearday’s ability to maintain operating margins through price increases to private pay options may be limited.
Healthcare policy changes, including proposals to reform the U.S. healthcare system, may harm the Clearday’s future business.
Healthcare costs have risen significantly over the past decade. There have been and continue to be proposals by legislators, regulators and third-party payors to keep these costs down. Clearday is unable to assess with certainty the extent of governmental requirements and regulations that will apply to Clearday’s care and wellness businesses. See “Business – Government Regulation - Residential Care and Adult Day Care Businesses.” The regulations that affect our operations are subject to changes. In addition, these regulations and other ongoing initiatives in the United States have increased and will continue to increase pressure on pricing and operations of residential and non-residential care facilities. The announcement or adoption of any government initiative could have an adverse effect on potential revenues from any product that Clearday may successfully develop. Moreover, additional legislative or regulatory changes remain possible and appear likely. Various healthcare reform proposals have also emerged at the state level. Clearday cannot predict what healthcare initiatives, if any, will be implemented at the federal or state level, or the effect any future legislation or regulation will have on Clearday. However, an expansion in government’s role in the U.S. healthcare industry may lower the revenues for future products and adversely affect Clearday’s future business, possibly materially.
Clearday is unable to determine the effect of the amount of wage increases that are expected with labor shortages and any regulatory changes effected by the administration of President Biden, including regulations regarding minimum wages and benefits.
The care industry, and businesses in general, have experienced, and may continue to experience, significant labor shortages, particularly for caregivers. Clearday will continue to compete with other residential care community and day care operators, among others, to attract and retain qualified personnel responsible for the day-to-day operations of Clearday’s current and planned care and wellness businesses. The market for qualified staff, including professional staff such as nurses, therapists and other healthcare professionals, is highly competitive, and periodic or geographic area shortages of such healthcare professionals may require us to increase the wages and benefits that we offer to our employees in order to attract and retain such personnel or to utilize temporary personnel at an increased cost. Additionally, any shortages of staff may require us to retain per diem employees and incur overtime, each of which would increase our wage and benefit expenses. In addition, employee benefit costs, including health insurance and workers’ compensation insurance costs, have materially increased in recent years and Clearday cannot predict the future impact of the Healthcare Reform Act, or any other future healthcare legislation, on the cost of employee health insurance. Increasing employee health insurance and workers’ compensation insurance costs may materially and adversely affect our earnings. From time-to-time labor unions may attempt to organize Clearday’s employees. If Clearday’s employees were to unionize, it could result in business interruptions, work stoppages, the degradation of service levels due to work rules, or increased operating expenses that may adversely affect the results of operations. One of the consequences of the COVID-19 pandemic is a significant shortage of employees for many industries, including our residential care industry. Additionally, many states have increased the minimum hourly wage for employees, including Florida and Arkansas. The labor shortage has increased wage pressure and is likely to increase our wage and benefit expenses.
Clearday cannot be sure that labor costs will not increase or that any increases will be recovered by corresponding increases in the rates that Clearday will charge to our clients or otherwise. Any significant failure by us to control labor costs or to pass any increases on to clients through rate increases could have a material adverse effect on our business, financial condition and results of operations. Further, increased costs charged to Clearday’s clients may reduce Clearday’s occupancy and growth and related revenues.
Additionally, healthcare and elder care are important political issues. President Biden has used, and may continue to use, executive orders to achieve policy goals and objectives. In addition, such policy goals and objectives may be realized through legislation that is sponsored or otherwise supported by President Biden’s administration. Clearday is unable to assess the consequences of improvements to the healthcare systems and that may be realized by such actions, including any effect of increased costs or taxes.
| 19 |
The planned adult day care business may require Clearday to make significant capital expenditures to maintain and improve care centers.
Clearday’s planned adult day care and clinics and related facilities may require from time-to-time significant expenditures to address required ongoing maintenance or to make them more attractive to Clearday’s clients. Physical characteristics of facilities are mandated by various government authorities; changes in these regulations may require Clearday to make significant expenditures. Supply chain issues and building material shortages have increased, and may continue to increase, construction costs, including the costs for expected leasehold improvements. In addition, Clearday may often be required to make significant capital expenditures when Clearday acquires, leases or manages new facilities. Clearday’s available financial resources may be insufficient to fund these expenditures. Clearday may be unable to pay increased rent at any facility without experiencing losses.
Because the AIU Merger resulted in an ownership change under Section 382 of the Internal Revenue Code Clearday, Clearday’s pre-AIU Merger NOL carryforwards and certain other tax attributes are subject to limitations.
We underwent an “ownership change” within the meaning of Section 382 of the Internal Revenue Code (“Section 382”), the corporation’s NOL carryforwards and certain other tax attributes arising before the ownership change are subject to limitations on use after the ownership change. In general, an ownership change occurs if there is a cumulative change in the corporation’s equity ownership by certain stockholders that exceeds fifty percentage points over a rolling three-year period. Similar rules may apply under state tax laws. Our NOL carryforwards and certain other tax attributes will be subject to limitations (or disallowance) on their use. Section 382 limitation will cause a significant portion of Clearday’s pre-AIU Merger net operating loss carryforwards to never be utilized. In addition, if Clearday is determined to have discontinued its historic pre-AIU Merger business following the AIU Merger, subject to certain exceptions, the Section 382 limitation could eliminate all possibility of utilizing Clearday’s pre-AIU Merger NOL carryforwards. Additional ownership changes in the future could result in additional limitations on Clearday’s NOL carryforwards. Consequently, even if we achieve profitability, we may not be able to utilize a material portion of the NOL carryforwards and other tax attributes, which could have a material adverse effect on our cash flow and results of operations.
Clearday has a limited history of operations, and our Longevity-tech planform and Clearday Care adult day care businesses are each an emerging business that will expose us to the risks and uncertainties associated with operating and growing an emerging business within an emerging industry.
Each of the innovative care solutions and the adult day care and robotic businesses to be conducted by us is significant to our growth opportunities and plans. These businesses include the virtual day care business and the adult day care services through physical locations and the sale of robots. Clearday does not have any material operational history in such businesses by which potential investors can evaluate our past performance and likelihood of success. As of the date of this Report, we have only one adult day care business do not have any centers that use our proprietary Clearday Clubs format or any revenue from our robotic business. The financial position and results of operations of Clearday, including our most recent financial statements included in this Report, are not indicative of the tech-enabled non-acute care businesses that we intend to pursue. Such Clearday businesses do not have any earnings history for investors to estimate our future level of sales or profitability or whether Clearday will in fact have sales or profitability. As a result of such industry and geographic focus, the conditions affecting older Americans as well as the local economies and real estate markets in such geographic areas and other factors that may result in a decrease in demand for our services in these areas could have an adverse effect on Clearday’s revenues, results of operations and cash flow. A core component of our strategy is the development and expansion of our tech-enabled non-acute care businesses. Our ability to successfully execute future development in accordance with our business plan, or at all, will be impacted by a number of factors, including the ability to sell our remaining non-core assets, the availability of financing on terms acceptable to us, market trends, the ability to identify and execute business opportunities (including acquisitions that meet the parameters of the Clearday business plan), and increased competition for sites for the expansion opportunities or acquisitions. Any such limitation on any such financing or sale of the remaining non-core assets may reduce income.
If Clearday fails to identify such changes and quickly and successfully respond to such changes to deliver accepted products and services, then competitors will be able to successfully penetrate the markets in which Clearday operates which may limit Clearday’s ability to successfully grow and/or maintain our businesses, which would adversely affect our business, financial condition, results of operations and prospects.
Clearday incurred substantial expenses related to the completion of the AIU Merger.
Clearday incurred substantial expenses in connection with the completion of the September 9, 2021 AIU Merger. Most of these costs were non-recurring expenses, including a substantial fee payable to AGP and legal and other professional fees and expenses and insurance expenses, and the fees related to the registration and issuance of the common stock issued in connection with such AIU Merger. Clearday does not have excess cash flows from its existing businesses to fund the payment of such additional expenses and will require revenues from its innovative businesses or the ability to raise capital through the sale of securities. There can be no assurance that we are able to raise additional funds through the sale of its securities on terms that are acceptable or at all.
| 20 |
Risks Related to Our Capital Structure
Our stock price is volatile.
The market price of our common stock has been, and is expected to be, subject to significant volatility. The value of our common stock may decline regardless of our operating performance or prospects. Factors affecting our market price include:
| ● | liquidity and volume in the trading of our common stock; | |
| ● | market perception as to our ability to develop and launch our innovative care products and services; | |
| ● | our perceived prospects and liquidity, including our ability to sell non-core assets; | |
| ● | our perceived ability to sell products and services directly to the residents in our residential care facilities and otherwise expand our revenues from current fees from our residential care business; | |
| ● | variations in our operating results and whether we have achieved key business targets; | |
| ● | changes in, or our failure to meet, earnings estimates; | |
| ● | changes in securities analysts’ buy/sell recommendations; | |
| ● | differences between our reported results and those expected by investors and securities analysts; | |
| ● | announcements of new contracts by us or our competitors; | |
| ● | market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors; | |
| ● | general economic, political or stock market conditions; and | |
| ● | the impact of inflation on our operations, including our ability to control costs, including labor, food, and energy expenses. |
Recent events have caused stock prices for many companies, including ours, to fluctuate in ways unrelated or disproportionate to their operating performance. The general economic, political and stock market conditions that may affect the market price of our common stock are beyond our control. The market price of our common stock at any particular time may not remain the market price in the future.
We have a significant number of outstanding warrants and options and convertible securities, and future sales of the shares obtained upon exercise of these options, warrants and convertible securities could adversely affect the market price of our common stock.
As of December 31, 2022, we had
| ● | warrants that are currently exercisable to purchase up to approximately 5,112,320 shares of our common stock at a weighted average exercise price of approximately $6.88 per share, including warrants issued during 2023 to our lenders to purchase up to 1,076,000 shares of our common stock at a weighted average exercise price of approximately $0.75 per share, | |
| ● | securities that have been issued by our subsidiaries with an accrued amount equal to approximately $17,172,025 which may be exchanged for shares of our common stock at a price that is equal to the volume weighted average price of our common stock for 20 days prior to the date of such exchange, and | |
| ● | Series F Preferred Stock that may be converted into approximately 12,038,095 shares of our common stock. | |
| ● | an aggregate amount of 2,506,500 additional warrants that may be exercised by lenders upon the event of default of their loans at an average aggregate price per share of approximately $0.61. |
The holders may sell these shares in the public markets from time to time under a registration statement or, after the applicable six-month holding period is satisfied, under Rule 144, without limitations on the timing, amount or method of sale.
Additionally, we have issued to certain lenders an aggregate amount of approximately $965,000 of senior notes and warrants to purchase an aggregate amount of approximately 1,372,500 shares of our common stock. These notes and warrants may be converted or exercised upon an event of default under such notes.
The holders of such convertible or exchangeable for our shares of common stock may exercise such rights sell a large number of shares of our comment stock, which would likely cause the market price of our common stock to decline.
Our corporate governance structure may prevent our acquisition by another company at a premium over the public trading price of our shares.
It is possible that the acquisition of most of our outstanding voting stock by another company could result in our stockholders receiving a premium over the public trading price for our shares. Provisions of our restated certificate of incorporation and our amended and restated bylaws, each as amended, and of Delaware corporate law could delay or make more difficult an acquisition of our company by merger, tender offer or proxy contest, even if it would create an immediate benefit to our stockholders. For example, our restated certificate of incorporation does not permit stockholders to act by written consent, and our bylaws generally require ninety days’ advance notice of any matters to be brought before the stockholders at an annual or special meeting.
In addition, our board of directors has the authority to issue shares of preferred stock and to determine the terms, rights and preferences of this preferred stock, including voting rights of those shares, without any further vote or action by the stockholders and while we are not listed on an exchange such as the NYSE American, we can issue a significant number of voting shares and voting power without stockholder approval. The rights of the holders of common stock may be subordinate to, and adversely affected by, the rights of holders of preferred stock that may be issued in the future. The issuance of preferred stock could also make it more difficult for a third party to acquire most of our outstanding voting stock, even at a premium over our public trading price.
Furthermore, our certificate of incorporation also provides for a classified board of directors with directors divided into three classes serving staggered terms. These provisions may have the effect of delaying or preventing a change in control of us without action by our stockholders and, therefore, could adversely affect the price of our stock or the possibility of the sale of shares to an acquiring person.
| 21 |
We do not anticipate declaring any cash dividends on our common stock.
We have never declared or paid cash dividends on our common stock and do not plan to pay any cash dividends in the near future. Our current policy is to retain all funds and earnings for use in the operation and expansion of our business.
General Risk Factors
The price of Clearday’s common stock may decrease.
The market price of the Clearday’s common stock may decline as a result of a few reasons, including if:
| ● | the planned development and expansion by Clearday of the adult day care business or digital services or other innovative products and services is delayed or not successful; or | |
| ● | Clearday’s business and prospects are not consistent with the expectations of financial or industry analysts. |
Our ability to protect our patents and other proprietary rights is uncertain, exposing us to possible losses of competitive advantage.
Our efforts to protect our proprietary rights may not succeed in preventing infringement by others or ensure that these rights will provide us with a competitive advantage. Pending patent applications may not result in issued patents and the validity of issued patents may be subject to challenge. Third parties may also be able to design around the patented aspects of the products or design around our copyrights, including the coding for our digital services. Additionally, certain of the issued patents and patent applications are owned jointly with third parties. Because any owner or co-owner of a patent can license its rights under jointly owned patents or applications, inventions made by us jointly with others are not subject to our exclusive control. Any of these possible events could result in losses of competitive advantage.
We depend on specific patents and licenses to technologies, and it will likely need additional technologies in the future that it may not be able to obtain.
We utilize technologies under licenses of patents from others for certain of our products. These patents may be subject to challenge, which may result in significant litigation expenses (which may or may not be recoverable against future royalty obligations). Additionally, we may be required to utilize intellectual property rights owned by others, including patents developed by a third-party engineering firm for the cryogenic air quality system, and may seek licenses to do so. Such licenses may not be obtainable on commercially reasonable terms, or at all. It is also possible that Clearday may inadvertently utilize intellectual property rights held by others, which could result in substantial claims.
Other parties may have the right to utilize technology important to our business.
We utilize certain intellectual property rights under non-exclusive licenses or have granted to others the right to utilize certain intellectual property rights licensed from a third party. Because we may not have the exclusive rights to utilize such intellectual property, other parties may be able to compete with us, which may harm our business.
We will face significant competition.
We will compete with numerous care and wellness companies, including developers, owners and operators of residential and non-residential facilities, many of which own or operate facilities that are like Clearday’s current and planned facilities in the same markets in which we are, or will be located. Clearday competes with numerous other managers and operators of care and wellness businesses that are focused on the non-acute care market, including adult day care centers and products that compete with products that will be distributed by Clearday. Some of Clearday’s competitors are larger and have greater financial resources than us and some of our competitors are not for profit entities which have endowment income and may not face the same financial pressures as us. We cannot be sure that we will be able to attract enough clients or residents at rates that will generate acceptable returns or that we will be able to attract employees and keep wages and other employee benefits, insurance costs and other operating expenses at levels which will allow us to compete successfully and operate profitably.
Clearday’s competition may also be from senior housing, senior healthcare, home healthcare, medical and healthcare providers and technology companies that expand their services or otherwise provide comparable services or utilize tech-enabled products and services that Clearday will utilize. Any such company or combination of companies may have referral or strategic relationships that reduce the number of consumers that would otherwise use Clearday’s products or services. In recent years, a significant number of new senior age communities and services have been developed and continue to be developed. Accordingly, Clearday expects to have increased competitive pressures, particularly in certain geographic markets where Clearday’s intends to operate our care services. These competitive challenges may prevent Clearday from establishing, maintaining or improving revenues, which may adversely affect Clearday.
| 22 |
Our Longevity-tech platform may innovate and disrupt the way that care services are delivered. Other technologies may be in development and may soon be in the market that will compete with our Longevity-tech platform including those that may have more advanced technologies or automated intelligence capabilities than our Longevity-tech platform. The companies that are developing such technologies may work with multi-national companies that have significantly greater resources than us, including distribution and marketing and other services that compliment and improve the services deliverable through our Longevity-tech platform.
Federal, state and local employment related laws and regulations could increase Clearday’s cost of doing business, and Clearday may fail to comply with such laws and regulations.
Clearday’s operations are subject to a variety of federal, state and local employment related laws and regulations, including, but not limited to, the U.S. Fair Labor Standards Act, which governs matters such as minimum wages, the Family and Medical Leave Act, overtime pay, compensable time, recordkeeping and other working conditions, and a variety of similar laws that govern these and other employment related matters. Because labor represents (and will represent) a significant portion of Clearday’s ordinary operating expenses from its care and wellness businesses, compliance with these evolving laws and regulations could substantially increase Clearday’s cost of doing business, while failure to do so could subject Clearday to significant back pay awards, fines and lawsuits. Clearday’s failures to comply with federal, state and local employment related laws and regulations could have a material adverse effect on our business, financial condition and results of operations.
The US federal minimum wage increases in five steps over five years ending with a $15 minimum wage in 2025, with an automatic increase in line with changes in the median hourly wage in the economy. Certain states have increased the minimum wage to $15 per hour. Additionally, we have received benefits of the Employee Retention Credits under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) which have ended during 2021 This and other labor related actions have increased the cost of our operating expenses. The extent of such actions cannot be predicted with any certainty.
Clearday may fail to comply with laws governing the privacy and security of personal information, including relating to health information.
Clearday will be required to comply with federal and state laws governing the privacy, security, use and disclosure of personally identifiable information and protected health information. State laws also govern protected health information, and rules regarding state privacy rights. Other federal and state laws govern the privacy of other personally identifiable information. If Clearday fails to comply with applicable federal or state standards, then we could be subject to civil sanctions and criminal penalties, which could materially and adversely affect Clearday’s business, financial condition and results of operations.
Clearday will continue to incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.
Clearday will continue to incur significant legal, accounting and other expenses, including costs associated with public company reporting requirements. Clearday will also incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as rules implemented by the SEC and any exchange that Clearday may have its common stock listed. These rules and regulations are expected to increase Clearday’s legal and financial compliance costs and to make some activities more time-consuming and costly. The executive officers of Clearday will continue to need to devote substantial time to gaining expertise regarding operations as a public company and compliance with applicable laws and regulations. These rules and regulations also have made it expensive for Clearday to obtain directors’ and officers’ liability insurance. As a result, it may be more difficult for Clearday to attract and retain qualified individuals to serve on our board of directors or as our executive officers, which may adversely affect investor confidence in Clearday and could cause our business or stock price to suffer.
Clearday may become subject to litigation, which could have an adverse effect on its performance.
Clearday may from time to time become subject to litigation, including claims relating to our residential care and other operations. Clearday’s planned businesses include the continuation of our residential care facilities, adult day care and our planned in-home care which are businesses that are regulated and have a high risk for plaintiff actions. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. Clearday generally intends to vigorously defend itself; however, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against the us may result in Clearday having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and settlements exceed insured levels, could adversely impact Clearday’s earnings and cash flows, thereby having an adverse effect on Clearday’s financial condition, results of operations, cash flow and per share trading price of our common stock. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flows, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors.
Clearday depends on key personnel whose continued service is not guaranteed.
Clearday’s ability to manage its businesses and anticipated future growth depends, in large part, upon the efforts of key personnel, particularly James Walesa, our Chairman and Chief Executive Officer, and B.J. Parrish, our director and Chief Operating Officer. Such key personnel have extensive knowledge and relationships and exercise substantial influence over Clearday’s operational, financing, acquisition and disposition activity. There is significant competition in the care and wellness industry for experienced personnel and there is a risk that Clearday may not be able to continue to retain our key personnel. The loss of services of one or more members of Clearday’s executive management team, or Clearday’s inability to attract and retain highly qualified personnel, could adversely affect Clearday’s business, diminish Clearday’s investment opportunities and weaken Clearday’s relationships with lenders, business partners, existing and prospective tenants and industry personnel, which could adversely affect us.
| 23 |
Clearday relies on information technology and systems in its operations, and any material failure, inadequacy, interruption or security failure of that technology or those systems could materially and adversely affect us.
Clearday will continue to rely on information technology and systems, including the internet and commercially available software, to process, transmit, store and safeguard information and to manage or support a variety of our business processes, including financial transactions and maintenance of records, which may include personally identifiable information of employees, residents and clients. If Clearday experiences security breaches or other similar failures, or other inadequacies or interruptions of our information technology, we could incur material costs and losses and our operations could be disrupted as a result. Further, third-party vendors could experience similar events with respect to their information technology and systems that impact the products and services they provide to us. We will continue to rely on commercially available systems, software, tools and monitoring, as well as our internal procedures and personnel, to provide security for processing, transmitting, storing and safeguarding confidential resident, customer and vendor information, such as personally identifiable information related to our employees and others, including our residents and clients, and information regarding their and Clearday’s financial accounts. We will continue to take various actions, and may incur significant costs, to maintain and protect the operation and security of our information technology and systems, including the data maintained in those systems. However, it is possible that these measures will not prevent the systems’ improper functioning or a compromise in security, such as in the event of a cyberattack or the improper disclosure of personally identifiable information.
Security breaches, computer viruses, attacks by hackers, online fraud schemes and similar breaches can create significant system disruptions, shutdowns, fraudulent transfer of assets or unauthorized disclosure of confidential information. The cybersecurity risks to Clearday and our third party vendors are heightened by, among other things, the evolving nature of the threats faced, advances in computer capabilities, new discoveries in the field of cryptography and new and increasingly sophisticated methods used to perpetuate illegal or fraudulent activities against Clearday, including cyberattacks, email or wire fraud and other attacks exploiting security vulnerabilities in Clearday’s or third parties’ information technology networks and systems or operations. Any failure to maintain the security, proper function and availability of Clearday’s information technology and systems, or certain third party vendors’ failure to similarly protect their information technology and systems that are relevant to the Clearday or our operations, or to safeguard Clearday’s business processes, assets and information could result in financial losses, interrupt Clearday’s operations, damage our reputation, cause us to be in default of material contracts and subject us to liability claims or regulatory penalties. Any or all of the foregoing could materially and adversely affect our business and the value of our securities.
Changes in tax laws or other actions could have a negative effect on us.
At any time, the federal or state income tax laws, or the administrative interpretations of those laws, may be amended. Federal and state tax laws are constantly under review by persons involved in the legislative process, the IRS, the U.S. Department of the Treasury and state taxing authorities. Changes to the tax laws, regulations and administrative interpretations, which may have retroactive application, could adversely affect us. The administration of President Biden has recently proposed changes to the Internal Revenue Code that, if enacted, could have adverse tax consequences for us. Such proposals are subject to significant changes. There cannot be any assurances as to any changes in the Internal Revenue Code that may be implemented, including any that may be adverse to us.
Clearday’s insurance may not cover potential losses, including from adverse weather conditions, natural disasters and other events.
We carry commercial property, liability and other insurance coverage on our business. We select policy specifications and insured limits that we believe to be appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. We do not expect to carry insurance for losses such as loss from riots or war because such coverage is not available or is not available at commercially reasonable rates. Some of our policies, including those covering losses due to terrorism and certain other insurance policies, are subject to limitations involving large deductibles or co-payments and policy limits that may not be sufficient to cover losses, which could adversely affect our operations. We may discontinue terrorism or other insurance if the cost of premiums for any such policies exceeds, in our judgment, the expected benefit from carrying out the policies. If following the termination or failure to renew any insurance policy we experience an adverse uninsured event, we may be required to incur significant costs, which could materially adversely affect our business and financial performance. Additionally, insurance to cover the risk of business interruptions may not be available or available at commercially reasonable rates and may not cover the specific events that require the closure of interruption of any of our businesses.
If we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the assets and businesses that that was made. Furthermore, we may not be able to obtain adequate insurance coverage at reasonable costs in the future as the costs associated with property and casualty renewals may be higher than anticipated.
Clearday’s operations will be subject to risks from adverse weather and climate events.
Severe weather may have an adverse effect on certain residential care or adult day care facilities to be operated by us and by our remaining non-core assets. Flooding caused by rising sea levels and severe weather events, including hurricanes, tornadoes and widespread fires have had and may have in the future an adverse effect on such assets and facilities and result in significant losses to us and interruption of our business, even though we did not experience significant damage to our Naples facility during Hurricane Ian during September 2022. We may incur significant costs and losses as a result of these activities, both in terms of operating, preparing and repairing our residential care communities or adult day care centers or the properties owned by use in anticipation of, during and after a severe weather or climate-related event and in terms of potential lost business due to the interruption in operations that may not be adequately covered by insurance.
| 24 |
Terrorist attacks or riots in any locations in which Clearday acquires properties could significantly impact the demand for, and value of, Clearday’s properties.
Terrorist attacks and other acts of terrorism or war or riots would severely impact the demand for, and value of, Clearday’s planned businesses. Terrorist attacks in any of the metropolitan areas in which the Clearday expects to have operations also could directly impact the value of Clearday through damage, destruction, loss or increased security costs, and could thereafter materially impact the availability or cost of insurance to protect against such acts. A decrease in demand could make it difficult to maintain the expansion of the adult day care business in accordance with the business plan. To the extent that any future terrorist attack otherwise disrupts Clearday’s planned businesses, it may impair the ability to make timely payments to fund operations, which would harm the operating results and could materially and adversely affect us.
Current government policies regarding interest rates and trade policies may cause a recession.
The U.S. Federal Reserve policy regarding the timing and amount of future increases in interest rates and changing U.S. and other countries’ trade policies may hinder the growth of the U.S. economy. It is unclear whether the U.S. economy will be able to withstand these challenges and continue sustained growth. Economic weakness in the U.S. economy generally or a new U.S. recession would likely adversely affect Clearday’s financial condition, including by limiting Clearday’s ability to pay rent or other obligations and causing the value of Clearday’s owned and operated residential care communities, and remaining non-core assets and of our securities to decline. Further, general economic conditions, such as inflation, commodity costs, fuel and other energy costs, costs of labor, insurance and healthcare, interest rates, and tax rates, affect our operating and general and administrative expenses, and we have no control or limited ability to control such factors. Such economic uncertainties and conditions may adversely affect us and others, including our landlords, and our clients, such as by reducing access to funding or credit, increasing the cost of credit, limiting the ability to manage interest rate risk and increasing the risk that obligations will not be fulfilled, as well as other impacts which Clearday is unable to fully anticipate.
As a “smaller reporting company,” Clearday may avail itself of reduced disclosure requirements, which may make Clearday’s common stock less attractive to investors.
Clearday is a “smaller reporting company” under applicable SEC rules and regulations. As a “smaller reporting company,” Clearday may rely on exemptions from certain disclosure requirements that are applicable to other public companies, such as simplified executive compensation disclosures and reduced financial statement disclosure requirements in our SEC filings. Clearday may continue to rely on such exemptions for so long as it remains a “smaller reporting company”. These exemptions include reduced financial disclosure, reduced disclosure obligations regarding executive compensation, and not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
Decreased disclosures in Clearday’s SEC filings due to its status as a smaller reporting company may make it harder for investors to analyze the results of operations and financial prospects. Clearday cannot predict if investors will find Clearday’s common stock less attractive if it relies on these exemptions. If some investors find Clearday’s common stock less attractive as a result, there may be a less active trading market for Clearday’s common stock and Clearday’s stock price may be more volatile. Clearday may take advantage of the reporting exemptions applicable to a smaller reporting company until it is no longer a smaller reporting company, which status would end once it has a public float greater than $250 million. In that event, Clearday could still be a smaller reporting company if its annual revenues were below $100 million, and it has a public float of less than $700 million. Clearday’s reliance on these exemptions may result in the public finding that Clearday’s common stock to be less attractive and adversely impacts the market price of Clearday’s common stock or the trading market thereof.
We are subject to penny stock regulations and restrictions, and you may have difficulty selling shares of our common stock.
The Commission has adopted regulations which generally define so-called “penny stocks” as an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock is a “penny stock”, and we are subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to sale. As a result, this rule affects the ability of broker-dealers to sell our securities and affects the ability of purchasers to sell any of our securities in the secondary market.
For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the Commission relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.
| 25 |
There can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the Commission the authority to restrict any person from participating in a distribution of penny stock if the Commission finds that such a restriction would be in the public interest.
In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“FINRA”) has adopted similar rules that may also limit a stockholder’s ability to buy and sell our common stock. FINRA rules require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for such a customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
The “penny stock” rules make it more difficult for a stockholder to deposit our common stock with a broker dealer and to purchase or sell our common stock, which reduces the volume of transactions and increases the volatility of the price of our common stock.
Clearday expects to not pay cash dividends on its common stock and investors may have to sell their shares in order to realize the value for their investment.
Clearday has not paid any cash dividends on its common stock and does not intend to pay cash dividends in the foreseeable future. Clearday intends to use its cash for reinvestment in the development and expansion of the care and wellness business and to pay its debt and lease obligations. As a result, investors may have to sell their shares of common stock to realize any of their investment.
Clearday’s internal controls over financial reporting may not be effective, which could have a significant and adverse effect on Clearday’s business and reputation.
Clearday is subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC thereunder (“Section 404”). Section 404 requires Clearday to report on the design and effectiveness of its internal controls over financial reporting.
Some, but not all, of Clearday’s officers and directors have experience as officers or directors of a public company. Clearday’s internal controls have certain material weaknesses, including insufficient segregation of duties. Clearday has instituted efforts to remediate these concerns and enhance Clearday’s internal control environment to remediate these issues by the end of 2021. However, any failure to maintain effective controls could result in significant deficiencies or material weaknesses and cause Clearday to fail to meet its periodic reporting obligations or result in material misstatements in Clearday’s financial statements. Clearday may also be required to incur costs to improve its internal control system and hire additional personnel. This could negatively impact Clearday’s results of operations.
Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses and divert management’s attention from operating Clearday’s business, which could have a material adverse effect on Clearday’s business.
There have been other changing laws, regulations and standards relating to corporate governance and public disclosure in addition to the Sarbanes-Oxley Act, as well as new regulations promulgated by the SEC and rules promulgated by national securities exchanges. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, Clearday’s efforts to comply with evolving laws, regulations and standards are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. Clearday’s board members, Chief Executive Officer and Chief Financial Officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, Clearday may have difficulty attracting and retaining qualified board members and executive officers, which could have a material adverse effect on Clearday’s business. If Clearday’s efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies, Clearday may incur additional expenses to comply with standards set by regulatory authorities or governing bodies which would have a material adverse effect on Clearday’s business and results of operations.
Delaware law could discourage a change in control, or an acquisition of Clearday by a third party, even if the acquisition would be favorable to stockholders.
The DGCL contains provisions that may have the effect of making more difficult or delaying attempts by others to obtain control of Clearday, even when these attempts may be in the best interests of stockholders. Delaware law imposes conditions on certain business combination transactions with “interested stockholders”. These provisions and others that could be adopted in the future could deter unsolicited takeovers or delay or prevent changes in Clearday’s control or management, including transactions in which stockholders might otherwise receive a premium for their shares of common stock over then current market prices. These provisions may also limit the ability of stockholders to approve transactions that they may deem to be in their best interests.
| 26 |
Clearday’s board has the authority to issue “Blank Check” Preferred Stock, which could affect the rights of holders of Clearday’s common stock and may delay or prevent a takeover that could be in the best interests of Clearday’s stockholders.
The board of Clearday has the authority to issue shares of preferred stock (the “Series Preferred Stock”), in one or more series and to fix the number of shares constituting any such series, the voting powers, designation, preferences and relative participation, optional or other special rights and qualifications, limitations or restrictions thereof, including the dividend rights and dividend rate, terms of redemption (including sinking fund provisions), redemption price or prices, conversion rights and liquidation preferences of the shares constituting any series, without any further vote or action by the stockholders. Similarly, the Clearday board may authorize a subsidiary of Clearday to issue securities that may have any such rights, powers or preferences. The issuance of any such securities could affect the rights of the holders of Clearday’s common stock. For example, such issuance could result in a class of securities outstanding that would have preferential voting, dividend, and liquidation rights over Clearday’s common stock, and could (upon conversion or otherwise) enjoy all the rights appurtenant to the shares of our common stock. The authority possessed by the board of directors to issue Series Preferred Stock, or any such other securities could potentially be used to discourage attempts by others to obtain control of Clearday through any merger, tender offer, proxy contest or otherwise by making such attempts more difficult or costly to achieve. The board of directors may issue the Series Preferred Stock or any such other securities without stockholder approval and with voting and conversion rights which could adversely affect the voting power of holders of our common stock. There are no agreements or understandings for the issuance of Series Preferred Stock or any such other securities.
The market price and volume of Clearday’s common stock fluctuates significantly and could result in substantial losses for individual investors.
The stock market from time-to-time experiences significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may cause the market price and volume of Clearday’s common stock to decrease. In addition, the market price and volume of Clearday’s common stock is highly volatile.
Factors that may cause the market price and volume of the Clearday’s common stock to decrease include:
| ● | changes in stock market analyst recommendations regarding Clearday’s common stock or lack of analyst coverage; | |
| ● | fluctuations in Clearday’s results of operations, timing and announcements of our corporate news; | |
| ● | any adverse investor reaction to the September 9, 2021, AIU Merger; | |
| ● | adverse actions taken by regulatory agencies with respect to any facilities or their operations or therapeutic based procedures that Clearday provides; | |
| ● | any lawsuit involving any care or services or products that Clearday provides; | |
| ● | announcements of technological innovations by Clearday’s competitors; | |
| ● | public concern as to the safety of services or products developed by Clearday or others; | |
| ● | regulatory developments in the United States and in foreign countries; | |
| ● | the care and wellness industry conditions generally and general market conditions; | |
| ● | failure of Clearday’s results of operations to meet the expectations of stock market analysts and investors; | |
| ● | sales of Clearday’s common stock by its executive officers, directors and five percent stockholders or sales of substantial amounts of Clearday’s common stock, including amounts that are sold on market orders when there is insufficient volume and activity regarding our common stock; | |
| ● | changes in accounting principles; and | |
| ● | loss of any of our key employees and officers. |
Further, Clearday’s common stock will be subject to market disruptions that devalue the equity markets broadly, or certain sectors, which are caused by events that are not related to the business and operations of Clearday. Recent events in exchange listed securities resulted in significant loss of market value of shares for, among other matters, pandemics and market reaction to perceived global interconnected economies.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
| ITEM 2. | PROPERTIES |
During 2022, Clearday operated 4 residential care facilities and one adult day care facility:
| Facility * | Location | Facility Approximate Square Footage | ||
| Memory Care of Naples* | Naples, Florida | 32,930 | ||
| Memory Care of Westover Hills | San Antonio, Texas | 48,280 | ||
| Memory Care of Little Rock at Good Shepherd | Little Rock, Arkansas | 44,250 | ||
| Memory Care of New Braunfels | New Braunfels, Texas | 43,460 |
* The Memory Care of Naples facility is owned, and the other facilities were leased. Each of these leased facilities was terminated as described in “Recent Events.”
| 27 |
Our adult day care center is in San Antonio, Texas in a leased facility of approximately 5,100 square feet.
We also own our headquarters building located at 8800 Village Drive, San Antonio, Texas. This building is a 3-story medical office building located on 0.84 acres and has approximately 22,265 rentable square feet. Our Naples facility is subject to a mortgage of approximately $4,550,000 that is due on May 2, 2023. Our headquarters building in San Antonio, Texas is subject to a mortgage loan.
| ITEM 3. | LEGAL PROCEEDINGS |
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 established 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 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.
From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. Excluding ordinary, routine litigation incidental to our business, we are not currently a party to any legal proceedings that we believe would reasonably be expected to have a material adverse effect on our business, financial condition or results of operation or cash flow.
As of the date of this Report, we are subject to certain lawsuits, claims and other legal proceedings, including the following:
The tenant, MCA Simpsonville Operating Company LLC, referred to as Tenant, of the MCA community that is located in Simpsonville, South Carolina, referred to as the Simpsonville Facility, and other affiliates of the Company have a dispute with the landlord of the Simpsonville Facility, MC-Simpsonville, SC-UT, LLC, referred to as the Landlord, and its affiliates (Embree Group of Companies: Embree Construction Group, Inc., Embree Asset Group, Inc., and Embree Capital Markets Group, Inc., referred to collectively as Embree) under the terms of the lease. After non-payment, the Landlord instituted litigation (“Simpsonville Action 1”) 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. We have not paid this amount. In connection with the settlement of Simpsonville Action 1, Tenant entered into an agreement to transfer certain operations, including lease obligations, of the Simpsonville Facility 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 the future obligations under the lease.
The Landlord filed a second action on April 9, 2021 (Simpsonville Action 2), for claims similar to Simpsonville Action 1 including relief for payment of rent past due and reimbursement of taxes from October 2020 to the time of the trial in this action. This action captioned and numbered MC-Simpsonville, SC-UT, LLC v. Steve Person, James Walesa and Trident Healthcare Properties I, LP, Cause No. 21-0513-C425 in the 425th Judicial District Court of Williamson County, Texas. The court granted summary judgment in this matter in favor of the Landlord on April 14, 2023. Trident and the individual guarantors may appeal this judgement although there can be no assurance that Trident or the individual guarantors will be able prevail in any such appeal. The Landlord may pursue a final order of the court at the completion of a trial or otherwise. If such final order is granted, then subject to any appeal or other action, the Landlord may pursue to enforce the final judgement.
Under the structure used for the lease and operations of the Simpsonville Facility, a subsidiary of Clearday, Inc., Tenant is the direct obligor under the lease and another subsidiary of Clearday, Trident, is a guarantor of the lease obligations. Neither Tenant or Trident have any material assets. We are assessing the exposure of these matters to Clearday, Inc. under these actions, including any liability under indemnification agreements with the individual guarantors. We are scheduling a mediation of this matter and expect to attempt to negotiate a settlement, including the amount and payment terms with the Landlord. Such settlement discussions may continue after any summary judgement against Trident and the individual guarantors. There can be no assurance that the Company will settle these actions on terms that are acceptable or at all.
| 28 |
Certain subsidiaries of the Company that operate hotel assets did not pay employment related taxes such as required withholdings for Texas State unemployment taxes and federal income tax and employee and employer contributions for FICA (Social Security and Medicare) taxes, and federal unemployment tax for certain periods from December 31, 2018, to December 31, 2021. These subsidiaries have since made the appropriate filings with the Internal Revenue Service and the Company has accrued the full estimated amount of the underpaid taxes as well as the estimated penalties and interest. As of December 31, 2022, the amount of the estimated taxes, penalties, and interest, assuming that there is no waiver or mitigation of the penalties, is $261,000. The Company has accrued this amount in its audited consolidated financial statements as of December 31, 2022. We have met with the staff of the Internal Revenue Service with respect to this matter and believe that this subsidiary is entitled to additional tax credits and adjustments that would substantially reduce this liability. However, there can be no assurance that the Internal Revenue Service will agree that such credits and adjustments are available. Our audited consolidated financial statements as of December 31, 2022, do not accrue any amounts for such credits and adjustments.
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 $1,243,557 in such payroll taxes as of December 31, 2022. These subsidiaries have applied for certain tax credits, including ERTC and Families First Coronavirus Response Act. The Company expects to 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 audited consolidated financial statements as of December 31, 2022, of approximately $527,000, which amount does not include any taxes, penalties, and interest. We have met with the staff of the Internal Revenue Service with respect to this matter and believe that these subsidiaries are entitled to additional tax credits and adjustments that would substantially reduce this aggregate liability. However, there can be no assurance that the Internal Revenue Service will agree that such credits and adjustments are available. Our audited consolidated financial statements as of December 31, 2022, do not accrue any amounts for such credits and adjustments.
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 (summary judgement in this matter was entered in favor of the plaintiff and we have entered a notice to appeal); | |
| 2. | Libertas Funding LLC v. Memory Care at Good Shepherd, LLC, et. al. including James Walesa (a guarantor), filed in state court in Monroe County, New York on August 24, 2022 (summary judgement in this matter was entered in our favor and may be appealed by the plaintiff); | |
| 3. | Cloudfund LLC v MCA New Braunfels Operating Company LLC et. al. including James Walesa (a guarantor), filed in state court in Nassau County, New York on August 29, 2022; | |
| 4. | Cloudfund LLC v MCA Naples Operating Company, LLC and James Walesa (a guarantor), filed in state court in Nassau County, New York on August 30, 2022 (summary judgement in this matter was entered in favor of the plaintiff and we have entered a notice to appeal); | |
| 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 of Clearday. Other than as set forth above, each of 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.
A mortgage lender for our Naples, Florida facility commenced an action for nonpayment of the mortgage note. The action is captioned A.AD.A, INC.; Anga Properties, LLC; Arce Holdings, LLC; Benfam Holdings LLC; Carolina Resources, LLC; Emilio Diaz SD Investment Account, LLC; Michael B. and Irma B. Goldstein; David J. Gonzalez; Hersab Holdings, LLC; Indocan Investment USA Corporation; Armando Navarro; Robbia Properties LLC; Shochat Holdings I LLC; and Wekwit, Inc. (collectively referred to as the Naples Lender) vs. MCA Naples, LLC, Case No. 11-2023-CA-000243-0001- flied in the Circuit Court in and for Collier County, Florida (the “Benworth Action”). This litigation arises from the nonpayment under the mortgage and promissory note. The Benworth Action demands payment of the principal amount of the promissory note of $4,550,000 together with default interest, late charges, costs advanced, insurance advances, attorney’s fees and costs and seeks the Final Judgment of Foreclosure and such further relief as the court deems just and proper. The Benworth Action also seeks the amount from James Walesa, our Chief Executive Officer, under the personal irrevocable and unconditional guaranty, in favor of Benworth Capital Partners, LLC, of the obligations of MCA Naples, LLC under the mortgage and promissory note.
We are negotiating a forbearance or similar agreement with the Naples Lender which we expect will include payments under the promissory note and the settlement of the other claims and costs. We believe that the fair value of the building and land are greater than the amounts owed under the mortgage. We may also seek to refinance the mortgage obligations to the Naples Lender with another lender. There is no assurance, however, that we would be able to agree to any forbearance or similar agreement or be able to refinance the property on terms that are acceptable or at all.
We have been threatened with litigation by the law firm Rigrodsky Law, P.A. alleging unjust enrichment in connection with shareholder litigation commenced by such firm related to the AIU Merger and claiming damages of $200,000. This law firm alleges that the complaint that was filed caused material supplemental disclosures. The Company is assessing these allegations and expects to respond appropriately.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market for Common Stock
Our common stock trades on the OTC Markets OTCQB under the symbol “CLRD”. The following table details the high and low closing prices for our Common Stock as reported by OTC Markets OTCQB for the periods indicated.
| 2022 | High | Low | ||||||
| Quarter ended December 31, 2022 | $ | 1.08 | $ | 0.29 | ||||
| Quarter ended September 30, 2022 | $ | 1.19 | $ | 0.80 | ||||
| Quarter ended June 30, 2022 | $ | 2.50 | $ | 0.70 | ||||
| Quarter ended March 31, 2022 | $ | 2.90 | $ | 0.95 | ||||
| 2021 | High | Low | ||||||
| Quarter ended December 31, 2021 | $ | 4.15 | $ | 2.06 | ||||
| Quarter ended September 30, 2021* | $ | 10.87 | $ | 3.00 | ||||
| Quarter ended June 30, 2021 | $ | 10.76 | $ | 3.83 | ||||
| Quarter ended March 31, 2021 | $ | 7.58 | $ | 2.99 | ||||
* The AIU Merger closed during this period. Prior to such closing, the stock price was that of Superconductor Technologies Inc.
The high and low prices during the first quarter of 2023 ended March 31, 2023, were $1.30 and $0.47, respectively.
Holders of Record
We had approximately 425 holders of record of our common stock on March 31, 2023. This number does not include stockholders for whom shares were held in a “nominee” or “street” name.
| 29 |
Dividends
We have never paid cash dividends and intend to employ all available funds in the development of our business. We have no plans to pay cash dividends soon. Our ability to declare or pay dividends on shares of our common stock is subject to the requirement that we pay an equivalent dividend on each outstanding share of our Preferred Stock (on an as-converted basis).
Sales of Unregistered Securities
The information regarding the sale of equity securities of the Company required by this item has been previously included in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.
Repurchases of Equity Securities
None.
Warrants
The Company has three separate types of warrants that are outstanding:
| ● | warrants that were granted and outstanding by Superconductor Technologies Inc. (“STI”) prior to the effective date of the AIU Merger; | |
| ● | warrants assumed by the Company that were granted by AIU prior to the September 9, 2021, effective date of the AIU Merger; add | |
| ● | warrant that were issued by the Company after the AIU Merger. |
The following is a summary of such outstanding warrants at December 31 2022:
STI Warrants Prior to the AIU Merger Effective 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 that were issued by AIU and have been assumed by Clearday in the AIU Merger.
| Common Shares | ||||||||||||||||
| Total | Currently Exercisable | Exercise Price per Share | Expiration Date | |||||||||||||
| Warrants issued in connection with financings * | 3,281,508 | 3,281,508 | $ | 5.00 | November 15, 2029 | |||||||||||
| Warrants issued to a consultant ^ | 500,000 | 500,000 | $ | 11.00 | August 10, 2026 | |||||||||||
| * | Two of our subsidiaries have preferred securities that are classified under accounting principles generally accepted in the United States of America (“GAAP”) as Non-Controlling Interest: (1) the preferred stock designated as the Series I 10.25% cumulative convertible preferred stock, par value $0.01 per share of AIU Alt Care (the “Alt Care Preferred Stock”); and (2) the preferred limited partnership interests of Clearday OZ Fund (the “Clearday OZ LP Interests”). As of December 31, 2022, there are 1,376,118 warrants that were issued by Clearday to investors in the Alt Care Preferred Stock and the Clearday OZ LP Interests. As of the effective date of the AIU 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 AIU Merger, or an aggregate of 3,281,508 shares of the Company’s Common Stock. The exercise price per share for each is $5.00 per share, subject to adjustment for specified fundamental transactions such as stock splits, reverse stock splits and stock combinations. | |
| ^ | Prior to the closing of the AIU 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 AIU Merger at an exercise price of $11.00 per share, or 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. |
| 30 |
Lender Additional Remedy Warrants:
Each of the following warrants were issued in connection with a financing and provides that the warrant may only be issued upon an event of default under the related promissory note.
| Common Shares | ||||||||||||||
| Outstanding | Exercisable | Exercise Price | Maturity Date | |||||||||||
| Related to the January 12, 2023, Financing (Mast Hill LP) | 1,134,000 | 0 | $ | 0.75 | 5 years after Trigger Date* | |||||||||
| Related to the September 30, 2022, Financing (Mast Hill LP) | 472,500 | 0 | $ | 0.50 | 5 years after Trigger Date* | |||||||||
| Related to the July 1, 2022, Financing (Mast Hill LP) | 900,000 | 0 | $ | 0.50 | 5 years after Trigger Date* | |||||||||
| * | Trigger Date is defined as the date of an Event of Default under the promissory note that is related to the financing in which this warrant was issued. |
Lender Warrants:
| Common Shares | ||||||||||||||
| Related to the February 17, 2023, Financing (Jefferson Street Capital LLC) | 225,000 | 225,000 | $ | 0.75 | March 16, 2028 | |||||||||
| Related to the January 12, 2023, Financing (Mast Hill LP) | 851,000 | 851,000 | $ | 0.75 | February 14, 2028 | |||||||||
Derivative Calculation
During the year ended December 31, 2022, the Company calculated the fair value of the warrants granted based on assumptions used in the Cox-Ross-Rubinstein binomial pricing model using the following inputs: the price of the Company’s common stock on the date of issuance ranging from $0.81 to $0.82; risk-free interest rates ranging from 2.88% to 3.92%; volatility ranging from 130% to 132% based on the historical volatility of the Company’s common stock; exercise prices of $0.50; and terms of sixty months.
Stock Options
On December 31, 2022, we continued to have the two active equity award option plans, the 2003 Equity Incentive Plan and the 2013 Equity Incentive Plan (collectively, the “Stock Option Plan”) that were in effect for STI prior to the effective date of the AIU Merger. Although we can only grant new options under the 2013 Equity Incentive Plan. Under our Stock Option Plan, stock awards were made to our former directors, key employees, consultants, and non-employee directors and consisted of stock options, restricted stock awards, performance awards, and performance share awards. Stock options were granted at prices no less than the market value on the date of grant. There were no stock option exercises during the three and twelve months ended December 31, 2022. There were no stock options that were exercisable on December 31, 2022.
Restricted Stock
During 2022, we issued approximately 558,150 shares of our common stock to an institutional lender as additional fees for loans, 1,778,436 shares of common stock to our Chief Executive Officer in exchange for indebtedness we owed such individual and for $200,000 as stock-based compensation and approximately 334,345 shares of our common stock to third party consultants for services.
As of December 31, 2022, there was no unamortized stock compensation.
Equity of Subsidiary
Non-Controlling Interest
The AIU Alt Care Preferred stock and the Clearday OZ LP Interests accrue a preferred return of 10.25% per annum.
The exchange rate for each of the Alt Care Preferred Stock and the Clearday OZ LP Interests 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 AIU 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.
| ITEM 6. | [Reserved] |
Not applicable.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes many forward-looking statements. For cautions about relying on such forward-looking statements, please refer to the section entitled “Forward Looking Statements” at the beginning of this Report immediately prior to Item 1.
The following discussion should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Report. Some of the information contained in this discussion and analysis, including information with respect to Clearday, its plans, and strategy for its business and related financing, includes forward-looking statements that involve risks and uncertainties.
| 31 |
Overview
We shifted our business strategy to provide technologies and innovative care solutions to address the global aging crises and be less focused on operating residential care facilities. We have used our extensive experience in senior care, including owning and operating high-performing residential care facilities in the most challenging senior care venues (Memory and Alzheimer’s treatment), to develop our purpose-built Longevity-tech platform for the 170 million Americans turning 50 by 2030. See “Recent Events.”
Prior to the first quarter of 2023, our business was primarily focused on providing care at four residential care facilities and one adult day care center and the development of our Longevity-tech platform.
The discussion in this Item 7 includes the conduct of businesses at three residential care facilities that as of the date of this Report we terminated. See “Recent Events.”
As of December 31, 2022, we operated four residential memory care facilities that are in three U.S. states and operated through our Memory Care America LLC (“MCA”) subsidiary. These facilities focus on treating residents suffering from any of the 25 forms of dementia that may be treated in a residential care facility, Alzheimer’s being the most common. We use our knowledge and our experience in treating dementia and other cognitive disorders to develop technology-enabled businesses, aligned to next-generation non-acute care and wellness services and products.
All of our long-lived assets are located in the United States and, during the year ended December 31, 2022, and 2021, respectively, all of our revenue was derived from within the United States.
Seasonality
Residential care facilities are seasonal in nature. Generally, residential care facilities suffer revenue losses in winter months as there is often an increase in the loss of residents during these periods primarily because of flu and other health issues during such periods.
Results of Operations
Our operating revenues during 2022 were predominately from our four residential memory care facilities and our adult day care center. MCA earns revenue primarily by providing services to individual residents for a specified monthly fee, which fee includes all services such as room, meals and programs and to a lesser extent, certain community fees for a resident to move into a facility. All of MCA’s revenues are “private pay” which are charged directly to the resident and paid by such individual’s family or administrator. Residents may terminate services upon advance notice of a specified period. A portion of our 2022 revenues were from our adult day care business. Our adult day care service earns revenues primarily by providing services to individual clients for weekday sessions, which includes activities. A part of our revenues includes reimbursements to veterans under a program by the United States Department of Veterans Affairs (VA).
Our operating expenses are primarily the expenses of our MCA facilities described below as well as the expenses that we incur in our other businesses including adult day care and our Longevity-tech platform.
These SG&A Expenses during 2022 were primarily insurance, interest expense, bank fees, equity-based compensation and audit and other professional fees.
| 32 |
Certain Key MCA Statistical Data for the Years ended December 31, 2022, and 2021:
The following table presents a summary of our operations of our residential care business for the years ended December 31, 2022, and 2021, which do not include corporate overhead or our innovative care businesses such as our Longevity-tech platform including our digital offerings and robotic services or our adult day care business:
| Year ended, | Increase/(Decrease) | |||||||||||||||
December 31, 2022 * |
December 31, 2021 * |
Amount | Percent | |||||||||||||
| Revenues: | ||||||||||||||||
| MCA Resident Facilities | $ | 12,092,815 | $ | 12,603,346 | (510,531 | ) | (4.05 | )% | ||||||||
| Operating expenses: | ||||||||||||||||
| Wages and benefits | 8,215,600 | 9,276,098 | (1,060,498 | ) | (11.43) | % | ||||||||||
| MCA facility operating expenses | 4,875,402 | 5,553,826 | (678,424 | ) | (12.22) | % | ||||||||||
| Lease expenses (1) | 3,858,902 | 4,885,958 | (1,027,056 | ) | (21.02) | % | ||||||||||
| Depreciation and amortization | 613,674 | 465,089 | 148,585 | 31.95 | % | |||||||||||
| Total operating expenses | 17,563,578 | 20,180,971 | (2,617,393 | ) | (12.97 | )% | ||||||||||
| Operating loss | (5,470,763 | ) | (7,577,625 | ) | 2,106,862 | (27.80 | )% | |||||||||
| Interest | 2,404,843 | 689,211 | 1,715,632 | 248.93 | % | |||||||||||
| Impairment(2) | 4,396,228 | (4,396,228 | ) | 100.00 | % | |||||||||||
| Other (income) expenses(3) | (2,220,583 | ) | (4,505,496 | ) | 2,284,913 | (50.71 | )% | |||||||||
| Total other/(income) expenses | 184,260 | 579,943 | (395,683 |
) | (68.23 | ) | ||||||||||
| Net Loss | $ | (5,655,023 | ) | $ | (8,157,568 | ) | $ | (2,502,545 | ) | (30.68 | )% | |||||
| * | 2021 includes the results and operations of the Simpsonville facility. We did not operate the Simpsonville Facility from and after September 30, 2021. |
| 33 |
| (1) | Lease expenses includes the accrual of rent and related amounts that have not been paid to the lessor of the Simpsonville facility in connection with a dispute described in Item 3 – Legal Proceedings based on the amounts stated in the applicable lease agreement. |
| (2) | Impairment of Right of Use assets (leases) in 2021 regarding the facilities in New Braunfels, Texas, Naples, Florida and Simpsonville, South Carolina. |
| (3) | Other (income) expenses include the amount primarily arising from the forgiveness of PPP loans, and ERTC credits received and the gain on the sale of investment during 2021. |
MCA expenses are primarily related to the MCA facilities and providing care to the residents, including:
| ● | wages and benefits, including wages and wage-related expenses, such as health insurance, workers’ compensation insurance and other benefits for the Company MCA employees, including MCA management; | |
| ● | MCA facility operating expenses, including utilities, housekeeping, dietary, maintenance, regulatory requirements, insurance and administrative costs and salaries, including the compensation to persons who develop, market and provide our innovative products and services; | |
| ● | lease expenses for MCA facilities; | |
| ● | other general and administrative expenses, principally comprised of general management including the Company’s headquarters, general insurance, legal, accounting and investments in technology; | |
| ● | depreciation and amortization expense on buildings and furniture and equipment; | |
| ● | interest expenses for loans and other financings related to the MCA businesses, including loans to one lessor of three of the MCA facilities and the mortgage financing of the one owned MCA facility; and | |
| ● | Other expenses for the development of technology used in supporting operations and next generation of tech-enabled non-acute care and wellness solutions. |
Revenues. Our MCA Facility revenues decreased by approximately 4.0% or $0.5 million to approximately $12.1 million during 2022 from approximately $12.6 million during 2021, primarily due to lack of revenues from the Simpsonville community which was included in 2021 until September 30, when we executed the facility, lower revenues in some of the facilities due to number of residents, offset by additional revenues during 2022 from our adult day care which we acquired at the end of May 2021, resulting in approximately seven months of revenues from this facility during 2021.
Operating Expense. Operating expenses decreased by approximately 13.0% or $2.6 million to $17.6 million during 2022 from $20.1 million during 2021. MCA Facility total operating expenses are primarily allocated to the MCA wages and benefits and MCA facilities operating expenses and MCA lease expenses., primarily due to (1) the reclassification of some operating expenses into Selling General & Administrative expenses (2) offset in part by the reduction of operating expenses because, in the fourth quarter, we transferred the operations and obligations of our Simpsonville facility resulting in our operating expenses for the Simpsonville facility were reduced to a specified limit during the last quarter of 2021, which did not including the rental expense which was included for the full annual period. As such, the decrease of operating expenses allocated to the Simpsonville facility reflected only the operating expenses such as compensation and insurance during the fourth quarter. MCA lease expenses also increased due to operations and related amounts.
Research & Development. We did not record any R&D expenses during 2022 or 2021.
Depreciation and amortization. Our MCA Facility consolidated depreciation and amortization expenses increased by approximately 31.95% or $0.61 million during 2022 from $0.46 million during 2021, primarily because of the increase in such expenses allocated to MCA facilities that were being given back to the landlord as we accelerated the depreciated the remaining asset.
| 34 |
Interest. Our consolidated interest expense increased by approximately 248.93% or $1.7 million to $2.4 million during 2022 from $0.68 million during 2021. Our interest expense is primarily allocated to the MCA, which amounts accounted for approximately 79% or $2.4 million of such expenses during 2022 compared to approximately 100% during 2021. The increase in MCA allocated interest is primarily due to our high interest loans financings that were incurred to fund operating expenses and the development costs for our innovative products and services in advance of amounts received from the Internal Revenue Service under the employee retention tax credit (“ERTC”) program which was delayed. The interest expense that was not allocated to MCA related primarily to the mortgage on our headquarters building and other real estate assets. The amount of interest expense does not include any accrual of interest for unpaid interest under the MCA Agreements, each of which are not being paid by us. See Item 3 Legal Proceedings.
Impairment. There was not any impairment taken during 2022 as compared to 2021 where we there was an impairment charge of approximately $7.4 million impairment on our operating facilities in New Braunfels, Texas and Simpsonville, South Carolina Impairment a non-cash expense and related solely to analysis required under GAAP for long lived assets as described in footnote 4 to our 2021 audited financial statements included in this Report.
Other (income) expenses. Our consolidated other (income) expenses decreased significantly by approximately $2.3 million primarily due to ERTC grants in 2021.
Gain on sale of investment. There was no gain on the sale of investments in 2022 as compared to 2021 where there was a gain recorded before the AIU Merger realized from the gain on sale of investment or $1,172,151 during 2021 that was recorded as other (income) expenses.
Revenues and Expenses Not Allocated to the Facilities:
Revenues. We did not have any material revenues during 2022 that we have not allocated to the Facilities.
Expenses Not Allocated to the Facilities: Our operating and other expenses that are not allocated to our Facilities, included the following:
Operating Expenses. Our consolidated operating expenses decreased by approximately 31.77% or $9.0 million during 2022 from $13.2 million during 2021. We increased our accounting and financial staff to lessen our reliance on accounting consultants. Selling, General and Administrative Expenses: Our selling, general and administrative expenses decreased by a net amount of approximately 93.08% or $0.12 million during 2022 from $1.8 milling during 2021. The decrease is primarily due to the fees paid to our financial consultant or investment banker that were paid in 2021.
Depreciation and Amortization Expenses: Depreciation and amortization expenses decreased approximately 27.53% or $0.14 million.
Other (Income) Expenses: Other income increased by a net amount of approximately $million, primarily because primarily due to gains recorded in the $1.6 million of debt extinguishment with AGP and the coupled with losses in our hotel and real estate and our Simpsonville Facility
SG&A Expenses. Our consolidated SGA Expenses decreased by approximately 32.3% or $5,002,720 million during 2022 from $7,393,834 million during 2021, primarily due to the Company accounting for certain expenses including those for corporate expenses incurred in the development of the Company’s Longevity-tech platform, as operating expenses during 2022 rather than SG&A expenses as our Longevity-tech platform became available for sale or license. There was also a significant reduction in accounting services, audit, and legal services as 2022 did not have such expenses related to the AIU Merger and the amount of such expenses related to the litigations related to the Simpsonville Facility described in Item 3.
We ceased operating our Simpsonville Facility as of September 30, 2021, and terminated the lease in August 2022. During the nine months ending September 30, 2022, we recognized an aggregate net loss attributable to the Simpsonville Facility of approximately $0.65, primarily due to the continued accrual of lease expenses related to this Facility in the amount of approximately $0.63 million, offset by other income related to employee retention tax credit (“ERTC”) for certain employees under the CARES Act. As disclosed in our Current Report on Form 8-K filed on September 15, 2021, we entered into an Operations Transfer, Interim Management and Security Agreement (the “Simpsonville Transfer Agreement”) with Brookstone Terrace of Simpsonville, LLC (“Brookstone”) and, as described in Note 7 “Commitments and Contingencies” to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report, we terminated this lease with the landlord in connection with the settlement of a litigation. Until the date of such lease termination, we continued to accrue the lease expense. The base rent attributable to this Facility was 97,490 per month, subject to a 2% increase commencing June 1, 2022, offset by a $30,000 monthly credit under the Simpsonville Transfer Agreement payable by Brookstone that began on May 1, 2022.
Other Leased Facilities
As described under “Recent Events,” we terminated the leases of three of our Facilities, effective May 1, 2023.
Concentration of Risk—Revenues.
The Company’s revenue for the years ended 2022 and 2021 consisted of operations from our MCA residential facilities and our adult day care facility in four states (three states as of December 31, 2022). The Company expects to continue to be dependent on revenues from our remaining MCA community and our adult day care center until we can have revenues from our Longevity-tech platform. Any failure of our MCA community or adult day care center to continue these businesses would significantly and adversely impact the Company. The MCA revenues are primarily private pay and do not rely on reimbursements from Medicare or Medicaid. The Company expects that such concentration will continue until revenues are realized from its Clearday Clubs and our Longevity-tech planform.
| 35 |
The COVID-19 pandemic has slowed the ability of the Company to dispose of its remaining assets that are not related to its and lowered the expected price of such remaining assets.
Liquidity and Capital Resources.
Clearday requires cash to fund its current operations and continued innovation of non-acute care and wellness services. As of December 31, 2022, Clearday has an accumulated deficit of $(79,671,065) loss from continued operations of $(14,462,738) and losses from cash flows from operating activities in the amount of $(3,978,027).
Net cash from investing activities of continuing operations of $1,051,245 and net cash from financing activities was $2,157,345 due mostly to the proceeds from the sale of redeemable preferred shares and member units in subsidiaries.
We do not have sufficient cash resources from the net cash flows of operations from our current businesses to sustain our operations for the next twelve months and will rely on the continued sale of non-core assets, tax credits, government sponsored financing programs and related amounts, and raising capital through the sale of our securities. We expect to solicit additional capital as financing prior to the expected closing of the Viveon Merger or “bridge financing” and additional financing at the close or subsequent to the Viveon Merger closing. We are discussing terms with certain lenders for the bridge financing, although there can be no assurance that any such financing transactions will be consummated on the terms or timeframe currently contemplated, or at all.
The impact of the COVID-19 pandemic and any other public health emergency could continue to have a material adverse effect on Clearday’s business, results of operations, financial condition, liquidity and prospects in the near-term and beyond 2021. For example, during December of 2022 we temporarily suspended operations at our adult day care center due to COVID-19.
Clearday expects that the following factors will affect our future liquidity:
| ● | Operating revenues are expected to be affected, primarily because of | ||
| - | Our ability to monetize our Longevity-care platform through rental, distribution networks and sales | ||
| - | Our ability to open additional adult day care centers; | ||
| - | Our ability to increase revenues by providing additional products and services through our Longevity-care platform; and | ||
| - | Our ability to continue our joint ventures and add additional alliances to develop and market other care technologies. | ||
| ● | Operating costs are expected to be affected, primarily because of: | ||
| - | Our ability to reduce the staff to resident ratios in our remaining residential care facility; | ||
| - | The costs and expenses related to additional sales and marketing staff and staff to deploy our robots and other technologies, and reduce staff turnover through better training and recruitment; | ||
| - | The expiration of the Employee Retention Credit under the CARES Act, | ||
| - | Increased pressures on wages and agency fees due to industry staffing shortages; | ||
| - | Additional interest expenses related to our high interest loans that we have incurred during 2022, offset in part by expected refinancing of certain mortgages and debt and the receipt of other financings such as SBA sponsored programs and additional amounts that we expect to receive through tax credits; and | ||
| - | Reduced operating expenses related to our exit of memory care facilities. | ||
| ● | Selling and general administrative costs will be affected, primarily because: | ||
- |
The significant product development costs that are recorded as operating expenses are expected to remain consistent or be lower as our Longevity-tech planform and Clearday Clubs business models, strategies and marketing plans have been developed; and | ||
| - | We will incur additional compensation expense for our executives that have suspended their compensation to allow the Company to reduce its operation cash needs. | ||
| 36 |
Change in our business strategy
We have pivoted our business strategy as described in Item 1 – Recent Events. This change in business has shed three of our residential care facilities that used more than $.114 during 2022 of net cash in operations. We expect that our business that is focused on our Longevity Care platform will have substantially less net cash flow needs compared to our residential care businesses.
We expect to pursue the following that will materially affect our liquidity and net cash flow needs:
| ● | Continue the marketing of our Longevity-tech platform directly and through alliances and others; | |
| ● | Increase revenues in our remaining residential care facility by introducing products and services in our Longevity-tech platform that should also increase the number of residents; | |
| ● | Increase the number of our adult day care centers. | |
| ● | Obtain additional capital including bridge financing in anticipation of the Viveon Merger. | |
| ● | Obtain additional financing and incur additional liabilities in connection with the Viveon Merger. |
COVID-19. The pandemic and the regulatory responses and additional initiatives have and will likely continue to have a material effect on Company’s facilities-based businesses and operations.
We expect to continue to monetize our remaining assets that are not related to our care businesses
Funding History.
Clearday has historically financed its operations primarily through the sale of its equity and debt securities in private placements. Clearday has incurred negative cash flows from operations. On December 31, 2022, Clearday had an aggregate amount of cash and restricted cash of $.2 and a deficit of $63.5 million.
Cash Flows.
The following table ($ in 000) shows a summary of Clearday’s cash flows for the years ended December 31, 2022, and 2021:
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in activities of continuing operations | (3,978,027 | ) | (11,832,919 | ) | ||||
| Net cash provided by (used in) operating activities of discontinued operations | - | 9,222,731 | ||||||
| Net cash used in operating activities | (3,978,027 | ) | (2,610,188 | ) | ||||
| Net cash provided by investing activities of the continuing operations | 1,051,245 | (493,451 | ) | |||||
| Net cash provided used in investing activities | - | - | ||||||
| Net cash provided by investing activities | 1,051,245 | (493,451 | ) | |||||
| Net cash provided by continuing operations | - | - | ||||||
| Net cash used / provided in financings | 2,157,345 | 3,208,648 | ||||||
| Net cash provided by in financing activities | (769,437 | ) | 105,009 | |||||
Operating Activities.
Net cash used in operating activities was $3.9 million for the year ended December 31, 2022, and $2.6 million for the year ended December 31, 2021. Net cash used in continuing operations for the year ended December 31, 2022 resulted from a net loss of $14.5 million adjusted for certain non-cash items including approximately:
| ● | $1.6 million gain on the extinguishment of debt arising from the modification of the AGP Note, | |
| ● | $1.5 million amortization of right of use assets, | |
| ● | $1.2 million of costs related to derivative liabilities, | |
| ● | $1.0 million gain on the termination of our lease at the Simpsonville Facility, | |
| ● | $1.0 million relating to PPP loan forgiveness, | |
| ● | $0.9 million related to deferred revenues from promotional discounts, | |
| ● | $0.4 million related to stock-based compensation for certain officers, directors and consultative services, | |
| ● | $0.4 million equity issued in connection with financings, and | |
| ● | $0.5 million in other depreciation and amortization |
| 37 |
Investing Activities.
Net cash provided by investing activities was $1 million for the year ended December 31, 2022, and net cash provided of $05. million for the year ended December 31, 2021. Net cash used for the year ended December 31, 2022, consists primarily of investment activities in payments for capitalized software costs of $1.9 million, $0.982 million in cash from sale of property & equipment.
Financing Activities.
Net cash provided by financing activities was $2.1 million for the year ended December 31, 2022, and net cash used of $3.2 million for year ended December 31, 2021. Net cash provided by financing activities for the year ended December 31, 2022, consisted primarily of net proceeds received from the new loans is $8.3 million (i) cash in-flow from the sale of preferred and member interests in non-controlling entity of $0 million; (ii) repayment of long-term debt in the amount of $4.8 million.
HHS Government Grants
The Company recognizes income for government grants when grant proceeds are received and the Company determines it is reasonably assured that it will comply with the conditions of the grant, the Company will recognize the distributions received in the income statement on a systematic and rational basis. The Company will estimate the fair value of the grant using the applicable HHS definitions of healthcare related expenses and lost revenue attributable to COVID-19, considering the Company’s projected and actual results at the end of each reporting period.
Upon conclusion that the Company is reasonably assured that it has met the conditions of the grant, it must measure the amount of unreimbursed health-care related expenses and lost revenue related to COVID-19 at the end of each reporting period and release that amount from Refundable Advance to Other Revenue. During the year ended December 31, 2022, the Company has received grants amounting to $0 and total grant received so far by the Company amounts to 675,868.
Contractual Obligations and Commitments.
See Note 7 “Commitments and Contingencies” of the audited consolidated financial statements within this Quarterly analysis, which information is incorporated herein by reference.
Legal Proceedings.
Clearday is subject to legal proceedings. The disclosures in this part of Management’s Discussion and Analysis of Financial Condition and Results of Operations are provided under Item 3 - Legal Proceedings.
Off-Balance Sheet Arrangements.
Clearday is not a party to any off-balance sheet transactions. Clearday has no guarantees or obligations other than those which arise out of normal business operations.
Cash and Restricted Cash.
Cash, consisting of short-term, highly liquid investments and money market funds with original maturities of three months or less at the date of purchase, are carried at cost plus accrued interest, which approximates market.
Restricted cash as of December 31, 2022, and December 31, 2021, includes cash that Clearday deposited as security for obligations arising from property taxes, property insurance and replacement reserve Clearday is required to establish escrows as required by Clearday’s mortgages and certain resident security deposits.
Critical Accounting Policies and Significant Judgments and Estimates.
The preparation of the audited consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
| 38 |
For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition, Results of Operations – Critical Accounting Policies and Estimates” and the notes to our audited consolidated financial statements included in this Quarterly analysis.
During the years ended December 31, 2022, and 2021, there were no significant changes in our accounting policies and estimates other than the newly adopted accounting standards that are disclosed in Note 2 “Summary of Significant Accounting Policies” to our audited consolidated financial statements.
Impact of Climate Change.
Concerns about climate change have resulted in various treaties, laws and regulations that are intended to limit carbon emissions and address other environmental concerns. These and other laws may cause energy or other costs at The Company’s communities to increase. In the long term, the Company believes any such increased costs will be passed through and paid by the Company’s residents and other customers in higher charges for The Company’s services. However, in the short term, these increased costs, if material in amount, could materially and adversely affect the Company’s financial condition and results of operations.
Some observers believe severe weather in different parts of the world over the last few years is evidence of global climate change. Severe weather has had and may continue to have an adverse effect on certain senior living communities The Company operates. Flooding caused by rising seas levels and severe weather events, including hurricanes, tornadoes and widespread fires may have an adverse effect on the senior living communities the Company operates. The Company mitigates these risks by procuring insurance coverage. The Company believes adequate to protect the Company from material damage and losses resulting from the consequences of losses caused by climate change. However, the
The company cannot be sure that its mitigation efforts will be sufficient or that future storms, rising sea levels or other changes that may occur due to future climate change could not have a material adverse effect on the Company’s financial results.
Market Risk
We are exposed to various market risks, including changes in interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices. We do not enter into derivatives or other financial instruments for trading or speculation purposes. Our money market investments have no exposure to the auction rate securities market.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are a “smaller reporting company,” and, accordingly, we are not required to provide the information required by this Item.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The consolidated financial statements required by this Item, together with the report of our independent registered public accounting firm, begin on page F-1, immediately following the signatures to this annual report. Please refer to Item 15 of this report for an index of the consolidated financial statements included in this annual report.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None
| 39 |
| ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures; Changes in Internal Control Over Financial Reporting
Evaluation of Disclosure Controls and Procedures.
The Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), has evaluated our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired controls objectives. Any “material weaknesses” in the Company’s internal controls may arise because of the internal control environment of the Company.
Based upon that evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were ineffective. Specifically, the Company does not have adequate segregation of duties that adequately restrict user and privileged access to certain financial applications, programs, and data to appropriate company personnel; do not adequately limit access to electronic payment systems for authorized expenditures; and have inadequate cyber controls regarding the protection of our data and restricting data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately. Management has identified these weaknesses and have adopted a program to remediate such weaknesses.
Remediation Plan.
We instituted efforts to remediate these concerns and enhance our internal control environment, including increasing the number and skill set of its accounting and financial staff and reducing our reliance on third party accounting consultants. However, any failure to maintain effective controls could result in significant deficiencies or material weaknesses and cause the Company to fail to meet the Company’s periodic reporting obligations or result in material misstatements in the Company’s financial statements. The Company may also be required to incur costs to improve its internal control system and hire additional personnel. This could negatively impact the Company’s results of operations.
| 40 |
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the year ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
None.
| ITEM 9C. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |
Not Applicable
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Directors and Executive Officers
The following table sets forth certain information regarding those individuals currently serving as our directors (or nominated to serve as a director) and executive officers as of March 31, 2023:
| Name | Age | Position | ||
| Independent Directors: | ||||
| Elizabeth M. Caveness (2*)(3) | 59 | Director | ||
| Alan H. Channing (1)(2)(3*) | 78 | Director | ||
| Jeffrey A. Coleman (1)(3) | 47 | Director | ||
| Richard M. Levychin (1*) | 64 | Director | ||
| Executive Directors: | ||||
| BJ Parrish | 51 | Director and Chief Operating Officer and Chief Financial Officer | ||
| James T. Walesa | 62 | Director and Chief Executive Officer | ||
| Other Executive Officers: | ||||
| John R. Bergeron (^) | 66 | Independent Contractor | ||
| Linda Carrasco | 66 | Executive Vice President / President of Memory Care America | ||
| Richard M. Morris | 62 | Executive Vice President / General Counsel | ||
| Gary Sawina | 67 | Executive Vice President / Director of Real Estate |
| (1) | Member of our Audit Committee. | |
| (2) | Member of our Compensation Committee. | |
| (3) | Member of our Governance and Nominating Committee. | |
| * | Chair of such committee | |
| ^ | Mr. Bergeron is an independent contractor that resigned as our Chief Financial Officer on November 23, 2022, and continues to provide services to us. |
| 41 |
Each of our directors was nominated based on the assessment of our Nominating Committee and our Board that he has demonstrated: an ability to make meaningful contributions to our Board; independence; strong communication and analytical skills; and a reputation for honesty and ethical conduct. Our Board consists of and seeks to continue to include persons whose diversity of skills, experience and background are complementary to those of our other directors.
James T. Walesa
Chair of the Board and Chief Executive Officer
Mr. Walesa has served as the Chairman of Clearday’s board of directors and its Chief Executive Officer since the closing of the AIU Merger. He has been the Chairman and CEO of AIU, now known as Clearday Operations, Inc., since its formation. Mr. Walesa has been part of the managers or otherwise active in the business of Clearday and its predecessors. Mr. Walesa has more than three decades of experience in financial services with an emphasis on the real estate, energy and care and wellness industries. In 1988, Mr. Walesa founded the Asset Management & Protection Corporation (AMPC), where he currently serves as its Principal, a position he has held since 1988. From September 4, 2019, to December 2021 (when he retired as a securities broker), Mr. Walesa was a registered representative with Arkadios Capital LLC, a SEC full-service broker dealer, resident in their office in Park Ridge, Illinois. After such retirement, Mr. Walesa directed his business activities to Clearday. Mr. Walesa previously served on the advisory board of Nasdaq-traded Bank Financial Corp. (Nasdaq: BFIN) and currently serves as a member of the board of directors of Gadsden Properties, Inc. (OTC PINK: GADS), and the chairman of the board of Citadel Exploration, Inc. (OTC PINK: COIL) and a member of the board of directors of SitePro, a private company. He was the Chicago chairman for the National Multiple Sclerosis Society and is a member of the Alzheimer’s Alois Society in recognition of his leadership and support of the Alzheimer’s Association to prevent and cure dementia related disease. Mr. Walesa received a B.S. in Business Administration from Rockford University. Mr. Walesa was selected to serve on the board of Clearday due to his expertise in the real estate industry and his investment and capital market experience. Mr. Walesa was a director and officer of Clearday when its subsidiary filed for bankruptcy protection during July 2019. Additionally, Mr. Walesa is the guarantor of certain indebtedness of the Company or its subsidiaries that are subject to litigation and judgements as described under “Description of Business—Legal Proceedings”.
Clearday believes that Mr. Walesa’s knowledge of the business of Clearday, including his relationship with the Clearday stockholders, his negotiation of the AIU Merger agreement and his knowledge of the longevity care and wellness market qualify him to serve as the Chairman of the board of directors of the combined company.
BJ Parrish
Director and Chief Operating Officer and Chief Financial Officer
Mr. Parrish has served as a member of Clearday’s board of directors and its Chief Operating Officer since the closing of the AIU Merger and the Interim Chief Financial Officer since November 2022. He has been the director and the Chief Operating Officer of AIU, now known as Clearday Operations, Inc., since its formation. Mr. Parrish has served as the Chief Financial Officer and Secretary of Cibolo Creek Partners, LLC, a Delaware limited liability company, (“Cibolo Creek”), since 2005 and a Director since 2013 and, in such capacity, was integral to the investment and operations of the businesses that were acquired by Clearday. Mr. Parrish is responsible for the financial management of Cibolo Creek and the investments of which it serves as general partner or manager. Mr. Parrish is also instrumental in the raising of capital through both the equity and debt markets for all of Cibolo Creek’s investment ventures. Prior to Cibolo Creek, Mr. Parrish served as the Vice President of Cibolo Creek’s predecessor company, Midland Red Oak Realty Inc. where he was involved in the formation of a $100 million credit facility, as well the acquisition and disposition of over $200 million worth of commercial real estate assets across the Southwest United States. Prior to Midland Red Oak Realty Inc., Mr. Parrish was a financial analyst and a manager of investor relations with Southwest Royalties, Inc., a privately held oil and gas exploration and production company. Mr. Parrish received a B.B.A. in finance and an M.B.A., both from the University of Texas Permian Basin. Mr. Parrish is also the Interim Chief Executive Officer and a member of the board of directors of Gadsden Properties, Inc. (OTC: GADS). Mr. Parrish was selected to serve on the board of GPI due to his expertise in the real estate industry and his investment and capital market experience. Mr. Parrish was a director and officer of Clearday when its subsidiary filed for bankruptcy protection during July 2019.
Clearday believes that Mr. Parrish’s knowledge of the business of Clearday, and his knowledge of the longevity care and wellness market as well as his leadership in the sale of the non-core assets qualify him to serve as a member of the board of directors of the combined company.
| 42 |
Elizabeth M. Caveness
Director
Beth Caveness has served as a director, the Chair of our Compensation Committee and a member of our Governance and Nominating Committee since the closing of the AIU Merger. Beth Caveness, in 2001, founded Village Pharmacy of Hampstead Inc., an independent pharmacy located in Hampstead, North Carolina. She grew the business to four pharmacies and sold these independent pharmacies. Dr. Caveness is active in advocacy and works on a state and national level to improve pharmacy. She is a member of National Community Pharmacists Association (“NCPA”), North Carolina Association of Pharmacists and Community Pharmacy Enhanced Services Networks and serves on the Independent Pharmacy Network committee of PillPAC, a political action committee for the NCAP and on the advisory board for the Pender County, North Carolina Health Department. Dr. Caveness received her B.S. Biochemistry from North Carolina State University in 1986, a B.S. Pharmacy from the University of North Carolina at Chapel Hill in 1990 and her PharmD. from the University of North Carolina at Chapel Hill in 2005.
Clearday believes that Dr. Caveness’ experience as a pharmacist of almost 35 years and her knowledge and advocacy of the evolutions in the businesses that provide pharmaceuticals, nutraceuticals and related products in the longevity care and wellness industry qualify her to serve as a member of the board of directors of the combined company.
Alan H. Channing
Director
Alan Channing has served as a director, member of our Audit Committee, member of our Compensation Committee, Chair of our Governance and Nominating Committee since the closing of the AIU Merger. Alan Channing became the principal officer of Channing Consulting Group, LLC following his retirement as President and CEO of the Sinai Health System, Chicago, Illinois, in 2014, a role he held for ten years. Sinai Health System, a safety net provider, is an integrated delivery system located on Chicago’s west side. Under Mr. Channing’s leadership, Sinai achieved national recognition for clinical quality, community engagement and benefit, addressing disparities and creating the concept of “pre-primary” care. Mr. Channing has been the CEO of several large teaching hospitals including Wishard Memorial in Indianapolis, Elmhurst Hospital Center in Queens, New York, and the renowned Bellevue Hospital Center in Manhattan. Channing has served as a resource to the Ohio Hospital Association, the Cleveland Center for Health Affairs, Greater New York Hospital Association and the Hospital Association of New York State. He has testified before the US Congress, the Ohio Senate, and both houses of the Illinois legislature. He served as chairman of the Illinois Hospital Association during a challenging legislative year and as board chairman of Family Health Network, a Medicaid managed care company. He serves as an advisor to several healthcare organizations including AVIA Health which focuses on digital transformation for healthcare providers; 330 Partners which advises Federally Qualified Healthcare Clinics (FQHCs) on strategy, partnerships, and operations; and Genesis Orthopedics & Sports Medicine, a Chicago based orthopedic practice. Mr. Channing is active in many charities. He is a member of the Board of Directors of Medical Home Network (MHN), a not-for-profit collaborative that unites provider communities and diverse healthcare entities around a common goal: to redesign healthcare delivery and transform the way care is managed at the practice level. MHN began by focusing on Maternal and Child Health on the West and South Sides of Chicago. From October 2015 to present is an Algebra and Trig tutor with the New York City Public Schools. Mr. Channing graduated in 1968 with a B.S. Engineering /Industrial Management from the University of Cincinnati and in 2001 with a M.S. in Hospital Management from The Ohio State University where he retains an assistant professorship.
Clearday believes that Mr. Channing’s experience and knowledge of approximately five decades in sophisticated hospital systems including his knowledge of the longevity care and wellness qualify him to serve as a member of the board of directors of the combined company.
Jeffrey A. Coleman
Director
Jeffrey A. Coleman has served as a director, a member of our Audit Committee and a member of our Governance and Nominating Committee since the closing of the AIU Merger. Jeffrey A. Coleman is an attorney with 20 years’ experience in litigation and transactional work with a focus on elder and geriatric issues. This work has seen him represent an array of clients in his field, including professional fiduciaries, businesses, lenders, and individuals. He has also represented businesses as general counsel, including work as general counsel for a publicly traded company, Citadel Exploration, Inc. In his role as general counsel of such company, he was responsible for risk analysis, negotiation, solving operational challenges, and successfully completing acquisitions and divestitures. Mr. Coleman graduated from the University of California at Santa Barbara with high honors in 1997 and received a J.D. from Fordham University School of Law in 2000.
Clearday believes that Mr. Coleman’s experience, including his role as the general counsel of a public company, and almost 20 years of legal experience qualify him to serve as a member of the board of directors of the combined company.
| 43 |
Richard Levychin, CPA, CGMA
Director
Richard Levychin has served as a director and Chair of our Audit Committee since his appointment on January 31, 2022. Richard Levychin is a Managing Partner in the Commercial Audit and Assurance practice of Galleros Robinson, Certified Public Accountants, LLP, a mid-sized CPA and Advisory firm with offices in New York, New Jersey, Florida, and the Philippines, where he focuses on both privately and publicly held companies. Prior to taking this position in October 2018, Richard was the managing partner of KBL, LLP, a PCAOB certified independent registered accounting firm, since 1994. Mr. Levychin has over 35 years of accounting, auditing, business advisory services and tax experience working with both privately owned and public entities in various industries including media, entertainment, real estate, manufacturing, not-for-profit, technology, retail, technology, and professional services. His experience also includes expertise with SEC filings, initial public offerings, and compliance with regulatory bodies. As a business adviser, he advises companies, helping them to identify and define their business and financial objectives, and then provides them with the on-going personal attention necessary to help them achieve their established goals. Mr. Levychin is a member of the Board of Directors of Pershing Resources Company, Inc. (OTCMKTS: PSGR) and a member of the Board of Directors and Chairperson of the Audit Committee of AgriFORCE Growing Systems Ltd. (NasdaqCM: AGRI).
Mr. Levychin has written articles on a wide range of topics, which have been featured in several periodicals including Dollars and Sense, New York Enterprise Report, Black Enterprise Magazine, Forbes, Business Insider, and The Network Journal. He has also conducted seminars on a wide range of business topics including SEC matters and taxation for several organizations including the Black Enterprise Entrepreneurs Conference, the Entrepreneurs’ Organization (New York chapter) and the Learning Annex. Mr. Levychin is a member of several organizations including the New York State Society of Certified Public Accountants, the National Association of Tax Professionals, and the American Institute of Certified Public Accountants (AICPA). Richard was a founding member of the AICPA’s National Diversity and Inclusion Commission. He has also served as a member of the Governing Council of the AICPA, which is the governing body that oversees and sets policies for the AICPA. Richard is a member and a former board member of the New York Chapter of the Entrepreneurs’ Organization (“EO”), a dynamic, global network of more than 14,000 business owners in over 50 countries.
In 2018 Mr. Levychin was a recipient of the 5 Chamber Alliance MWBE Award from the Manhattan Chamber of Commerce. In 2016 Richard was presented with the 2016 Arthur Ashe Leadership Award. In 2015 Richard was presented by his alma mater Baruch College with the Baruch College Alumni Association’s “Alumni Leadership Award for Business”. In 2013 Richard received the title of Best Accountant from The New York Enterprise Report. Mr. Levychin is a past winner of The Network Journal’s prestigious “40 Under 40” award.
He is a graduate of Baruch College, where he received a Bachelors in Business Administration Degree (Accounting).
We have determined that Mr. Levychin is well suited to serve on our Board and chair our Audit Committee due to his decades of experience as a member of a PCAOB certified independent registered accounting firms, including decades of expertise with SEC filings and public offerings.
John R. Bergeron, CPA
Independent Contractor Former Chief Financial Officer
John Bergeron served as our Executive Vice President and Chief Financial Officer since December 8, 2021 through November 23, 2022. In such a capacity, he is our principal financial and accounting consultant. Mr. Bergeron provided consulting services to us during November and December 2021. Mr. Bergeron was also the Chief Financial Officer of Spine Injury Solutions, Inc., since October 2011 and one of their directors since July 2010 until the date that such company was sold, March 30, 2022. From May 2008 through September 2014, he served as President of Jolpeg Inc., a private firm that consults on financial matters in service industries. From May 2002 until May 2008, Mr. Bergeron served as Divisional Controller of Able Manufacturing, a division of NCI Group, Inc, where his responsibilities included financial reporting, budgeting and Sarbanes-Oxley Act compliance. Prior to that, Mr. Bergeron worked as controller of different internet companies and as an accounting manager for several other private firms. He has also worked as an auditor for Arthur Andersen. Mr. Bergeron has more than thirty years’ experience in financial management and corporate development of manufacturing and service industry companies. He has extensive experience in financial reporting of public companies, risk management, business process re-engineering, and structuring and implementing accounting procedures and internal control programs for Sarbanes-Oxley Act compliance. Mr. Bergeron is a Certified Public Accountant. He received a Bachelor of Business Administration in Accounting from Lamar University in 1979.
Linda L. Carrasco
Executive Vice President and President Memory Care America LLC
Ms. Carrasco has served as our Executive Vice President since the closing of the AIU Merger and has served as the President of our subsidiary MCA, Clearday’s residential memory care facility business, since July 2019, when she was promoted to that position from the Executive Director of the MCA’s Westover Hills, Texas facility, a position she held since June 2015. Prior to joining Clearday, Ms. Carrasco was the Executive Director—Sales specialist of Emeritus Senior Living in San Antonio, Texas and Oklahoma. Ms. Carrasco has more than 35 years of experience in skilled care residential facilities, including a license social worker (LBSW) for Town and Country Manor Nursing and Rehabilitation from 2010 to 2011, and Executive Director and Marketing Director of Asista Corporation from 1998 to 2010, and Manager and Regional Manager of Texas and Arizona of Southwest Health Management from 1994 to 1998. Ms. Carrasco holds a B.S. from Southwest Texas State University and holds the Assisted Living / Personal Care Management Certificate License, the Texas State Board of Social Workers Examiners Licensed Baccalaureate and is a Certified/Qualified Activities Director.
| 44 |
Richard M. Morris
Executive Vice President and General Counsel
Richard M. Morris has served as Clearday’s Executive Vice President and General Counsel since the closing of the AIU Merger and served in such capacity for AIU, now known as Clearday Operations, Inc., since January 1, 2020. Mr. Morris has been our lead executive in the development of our joint ventures including the development of our robotic services platform and is responsible for the significant decrease of our legal fees and related expenses. While serving as Clearday’s General Counsel since January 2020, Mr. Morris continues to practice law as a partner of Wilson Williams LLC, a corporate transaction boutique firm in its New York City office. Mr. Morris has been practicing attorney since 1990, including being a corporate partner with Herrick, Feinstein LLP, New York from 2002 to 2018 where he focused on securities and other regulatory matters; and as a Corporate partner with Allegaert Berger & Vogel LLP, New York, New York, since November 2018 to January 2020. In such positions with law firms, Mr. Morris was Clearday’s primary corporate and transaction counsel. Prior to becoming a lawyer, Mr. Morris was an auditor with the Commodities Exchange, Inc. in New York and later focused on operations and financial management at Kidder Peabody & Co. He also was the U.S. Audit Manager for the financial division for a diversified Australian company. Mr. Morris has a B.S. in Accounting from New York University (1982) and a J.D. from Fordham University School of Law (1990), with bar admissions in New York and Connecticut.
Gary Sawina
Executive Vice President and Director of Real Estate Operations
Mr. Sawina has served Clearday as its Executive Vice President and Director of Real Estate since the closing of the AIU Merger and has served in such position for AIU, now known as Clearday Operations, Inc., since its formation. In such capacity is the officer that oversees all aspects of the development of Clearday’s real estate including the renovation of 8800 Village Drive, the design and build out spaces for Clearday’s Adult Day Care centers and management of all of Clearday’s MCA and hotel facilities. Mr. Sawina has directly overseen the management of numerous new construction projects ranging from $42 million to $500 million in capital expenditures. In response to the pandemic, Mr. Sawina designed retrofits for the hotel properties so that rooms may be efficiently converted to negative pressure rooms. Mr. Sawina is a Las Vegas native and has had a career in gaming and hospitality of more than 40 years with senior positions. He held several gaming licenses, including Level 1 Gaming License—Nevada from 1990 to 2000; Level 1 Gaming License—Louisiana from 2002 to 2004; Level 1 Gaming License—Indiana from 2004 to 2010; and Owner’s Liquor License—Clark County, Nevada from 1999 to 2001. Mr. Sawina holds his B.S. in Business and Hotel Administration from University of Nevada, Las Vegas (1979).
Corporate Governance Policies and Practices
The following is a summary of our corporate governance policies and practices:
| ● | Our Board has determined that all our directors, other than Mr. Walesa and Mr. Parrish, are independent as defined by the rules of the SEC and The NYSE American stock exchange. Our Audit Committee, Compensation Committee and Governance and Nominating Committee each consists entirely of independent directors under the rules of the SEC and The NYSE American stock exchange. | |
| ● | We have a Code of Business Conduct and Ethics for all our employees, including our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. If we amend any provision of our Code of Business Conduct and Ethics that applies to any such officer (or any persons performing similar functions), or if we grant any waiver (including an implicit waiver) from any provision of our Code of Business Conduct and Ethics to any such officer (or any persons performing similar functions), we will disclose those amendments or waivers on our website at https://myclearday.com/corporate-governance/ within four business days following the date of the amendment or waiver. | |
| ● | Our Audit Committee reviews and approves all related-party transactions. | |
| ● | As part of our Code of Business Conduct and Ethics, we have made a “whistleblower” hotline available to all employees for anonymous reporting of financial or other concerns. Our Audit Committee receives directly, without management participation, all hotline activity reports concerning accounting, internal controls or auditing matters. |
Board Leadership Structure and Role in Risk Oversight
Our Board is involved in overseeing our risk management through our Audit Committee. Under its charter, our Audit Committee is responsible for inquiring with management and our independent auditors about significant areas of risk or exposure and assessing the steps management has taken to minimize such risks.
Stockholder Communications with Directors
Stockholders who want to communicate with our Board or with a particular director or committee may send a letter to our Secretary at Clearday, Inc, 8800 Village Drive, 2nd Floor, San Antonio, Texas 78217. The mailing envelope should contain a clear notation indicating that the enclosed letter is a “Board Communication” or “Director Communication.” All such letters should state whether the intended recipients are all members of our Board or just certain specified individual directors or a specified committee. The Secretary will circulate the communications (except for commercial solicitations) to the appropriate director or directors. Communications marked “Confidential” will be forwarded unopened.
| 45 |
Attendance at Annual Meetings of Stockholders
We expect all our Board members to attend our annual meetings of stockholders in the absence of a showing of good cause for failure to do so.
Board Meetings and Committees
During 2022, each of our directors attended at least 90% of the aggregate of (i) the total number of Board meetings and (ii) the total number of meetings of the committees on which the director served.
Board of Directors
Our Board has three standing committees: an Audit Committee established in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934 (our “Audit Committee”), a Compensation Committee (our “Compensation Committee”) and a Governance and Nominating Committee (our “Nominating Committee”). Our Audit Committee, Compensation Committee and Nominating Committee each have a charter, which is available at the “Corporate Governance” section under the “Investors” tab on our website at www.myclearday.com.
Audit Committee
The principal functions of our Audit Committee are to hire our independent public auditors, to review the scope and results of the year-end audit with management and the independent auditors, to review our accounting principles and our system of internal accounting controls and to review our annual and quarterly reports before filing them with the SEC. The current members of our Audit Committee are Mr. Levychin (Chairman), Mr. Channing and Mr. Coleman.
Our Board has determined that all members of our Audit Committee are “independent” as defined under the rules of the SEC. Our Board has determined that Mr. Levychin is an “audit committee financial expert.”
Compensation Committee
Our Compensation Committee reviews and approves salaries, bonuses and other benefits payable to our executive officers and administers our management incentive plan. Our Compensation Committee makes all compensation decisions with respect to our Chief Executive Officer and makes recommendations to our Board regarding non-equity compensation and equity awards to our other named executive officers (set forth below under “Executive Compensation—Summary Compensation Table”) and all other elected officers. In doing so, with respect to named executive officers other than the Chief Executive Officer, our Compensation Committee generally receives a recommendation from our Chief Executive Officer and other officers as appropriate. Our Chief Executive Officer also generally recommends the number of options or other equity awards to be granted to executive officers, within a range associated with the individual executive’s salary level and presents this to our Compensation Committee for its review and approval.
Our Compensation Committee uses available data to review and compare our compensation levels to market compensation levels, taking into consideration the other companies’ size, the industry, and the individual executive’s level of responsibility, as well as anecdotal data regarding the compensation practices of other employers. We do not annually benchmark our executive compensation against a defined peer group, since we believe that defining such a group is difficult and would not materially affect our decisions. Our Compensation Committee does not generally hire an outside consulting firm to assist with compensation, as we believe that the value of doing so is exceeded by the costs. No compensation consultant was engaged to provide advice or recommendations on our executive or director compensation for 2022.
Our Compensation Committee also reviews the compensation of directors and recommends to our Board the amounts and types of cash to be paid and equity awards to be granted to our directors.
The current members of our Compensation Committee are Ms. Caveness (Chair), and Mr. Channing. Our Board has determined that all members of our Compensation Committee are “independent” as defined under the rules of the SEC. Our Compensation Committee will only delegate its authority to the extent consistent with our certificate of incorporation and bylaws and applicable laws, regulations and listing standards.
Our Compensation Committee created the Stock Option Committee (our “Stock Option Committee”) consisting of two members—our Compensation Committee Chair and the Chief Executive Officer. The purpose of our Stock Option Committee is to facilitate the timely granting of stock options in connection with hiring, promotions and other special situations, and therefore our Stock Option Committee meets only periodically as certain events occur. Our Stock Option Committee is empowered to grant options to non-executive employees up to a preset annual aggregate limit. The Stock Option Committee did not meet during 2021. Our Compensation Committee supervises these grants and retains exclusive authority for all executive officer grants and the annual employee grants. The current members of our Stock Option Committee are Ms. Caveness (Chair) and Mr. Walesa.
| 46 |
Governance and Nominating Committee
Our Governance and Nominating Committee is responsible for overseeing and, as appropriate, making recommendations to our Board regarding, membership and constitution of our Board and its role in overseeing our affairs. Our Governance and Nominating Committee is responsible for proposing a slate of directors for election by the stockholders at each annual meeting and for proposing candidates to fill any vacancies. Our Governance and Nominating Committee is also responsible for the corporate governance practices and policies of our Board and its committees. The current members of our Governance and Nominating Committee are Mr. Channing (Chair), Ms. Caveness and Mr. Coleman. Our Governance and Nominating Committee met one time in 2022. Our Board has determined that all members of our Governance and Nominating Committee are “independent” as defined under the rules of the SEC.
Our Governance and Nominating Committee manages the process for evaluating current Board members at the time they are considered for re- nomination. After considering the appropriate skills and characteristics required on our Board, the current makeup of our Board, the results of the evaluations, and the wishes of our Board members to be re-nominated, our Governance and Nominating Committee recommends to our Board whether those individuals should be re-nominated.
Our Governance and Nominating Committee periodically reviews our Board whether it believes our Board would benefit from adding a new member(s), and if so, the appropriate skills and characteristics required for the new member(s). If our Board determines that a new member would be beneficial, our Governance and Nominating Committee solicits and receives recommendations for candidates and manages the process for evaluating candidates. Our considerations for board members are described in the Report under “Human Capital-Board Members.”
AUDIT COMMITTEE REPORT
The information contained in this Audit Committee Report shall not be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing (except to the extent that we specifically incorporate this information by reference) and shall not otherwise be deemed “soliciting material” or “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934 (except to the extent that we specifically request that this information be treated as soliciting material or specifically incorporate this information by reference).
Our Audit Committee reviews our financial reporting process on behalf of our Board. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls. Our Audit Committee has reviewed and discussed the audited financial statements with management. In addition, our Audit Committee has discussed with our independent registered public accounting firm the matters required to be discussed by Statements on Public Company Accounting Oversight Board Auditing Standard No. 16 “Communications with Audit Committees”.
Our Audit Committee has also received the written disclosures and the letter from our independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding their communications with the audit committee concerning independence, and has discussed with them their independence, including whether their provision of other non-audit services to us is compatible with maintaining their independence.
Our Audit Committee discussed with our independent registered public accounting firm the overall scope and plans for the audit. Our Audit Committee meets with them, with and without management present, to discuss the results of their examinations, the evaluation of our internal controls and the overall quality of our reporting.
Based upon the review and discussions referred to in the foregoing paragraphs, our Audit Committee recommended to our Board that the audited financial statements be included in our Annual Report on Form 10-K for 2021 for filing with the Securities and Exchange Commission.
| AUDIT COMMITTEE | |
| Richard Levychin (Chairman) | |
| Alan Channing and Jeffrey Coleman | |
| May 25, 2023 |
| 47 |
| ITEM 11. | EXECUTIVE COMPENSATION |
Summary Compensation Table
The following table sets forth for the annual periods ending December 31, 2022, and 2021 the base salary and other compensation of our (i) President and Chief Executive Officer and (ii) our other two most highly compensated officers for 2022 (our “named executive officers”):
| Name and Principal Position | Year | Salary ($) | Stock Awards ($)(1) | Option Awards ($)(1) | Non-equity Incentive Plan Compensation ($) | All Other Compensation ($)(2) | Total ($) | ||||||||||||||||||||
| Current Executive Officers | |||||||||||||||||||||||||||
| James T. Walesa * | 2022 | 72,815 | $ | — | — | — | 72,820 | ||||||||||||||||||||
| President, Chief | 2021 | 99,600 | $ | 101,400 | — | — | 201,000 | ||||||||||||||||||||
| Executive Officer, Director | |||||||||||||||||||||||||||
| Richard M. Morris * | 2022 | 114,860 | — | — | — | — | $ | 114,860 | |||||||||||||||||||
| Executive Vice President / General Counsel | 2021 | 200,000 | 50,700 | — | — | — | $ | 250,700 | |||||||||||||||||||
| Gary Sawina | 2022 | 132,200 | — | — | — | — | $ | 132,200 | |||||||||||||||||||
| Executive Vice President / Director of Real Estate Operations | 2021 | 132,000 | — | — | — | 23,857 | $ | 155,857 | |||||||||||||||||||
| John Bergeron | 2022 | 149,860 | — | — | — | — | 149,860 | ||||||||||||||||||||
| (Former executive officer – Chief Financial Officer) | 2021 | — | — | — | — | — | — | ||||||||||||||||||||
| (*) | During 2022, we reduced compensation with such executive primarily as a result of our liquidity issues. Such executive may receive increased compensation, to the extent such increased compensation is approved by our Compensation Committee, in connection with the Viveon Merger or otherwise. This table reflects that, during the third and fourth quarters of 2022 and to the date of this Report, certain of our executive officers and staff, including our Chief Executive Officer, Chief Operating Officer and General Counsel have suspended their compensation. | |
| (1) | The Stock Awards amounts represent the aggregate grant date fair value of the options to purchase common stock or shares of restricted common stock (as applicable) calculated in accordance with ASC718, under the assumptions included in Note 2 “Summary of Significant Accounting Policies” included in our audited financial statements for the year ended December 31, 2022, included in this Report. | |
| (2) | The All-Other Compensation amounts shown reflect the value attributable to term life insurance premiums, certain tax payments and company 401(k) matching for each named executive officer, if applicable, as well as other perquisites described below. Each named executive officer is responsible for paying income tax on such amounts. |
Narrative Disclosure to Summary Compensation Table
Employment Agreements
We do not have any employment agreements with any of our current executive officers other than the Officer Agreements with our prior executives. We had an employment agreement with our prior Chief Financial Officer, which is described in the AIU Merger Registration Statement and is no longer in effect.
Non-Equity Incentive Compensation
We maintain a bonus plan for executive officers and selected other members of senior management that was created by STI and which we will continue. Under the plan, our Compensation Committee establishes financial and other pertinent objectives for the period and assigns each executive officer an annual target bonus amount based on a percentage of his or her base salary, which ranges from 20% to 100%. Our Compensation Committee also retains the authority to award discretionary bonuses for performance in other aspects of the business not covered by the established goals. In December 2017, our Compensation Committee decided, based on then-current economic conditions, to not establish financial performance targets under this plan and to not award cash bonuses based on financial objectives going forward. Our Compensation Committee did reserve the right to award discretionary bonuses if appropriate; however, no bonuses were awarded for 2022 or 2021 under this plan.
| 48 |
Equity Grants
During 2022 and 2021, we issued restricted stock to our executive officers as disclosed under the Summary Compensation Table, above.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information with respect to outstanding options and unvested shares of restricted stock on December 31, 2022: There are no options outstanding at December 31, 2022.
Option Awards Stock Awards
All the stock options that have been issued to the STI executives under a stock option plan have expired. There are no options that have been issued by Clearday or STI that are outstanding.
Non-employee Director Compensation Table
The following table summarizes the compensation paid to our non-employee directors during 2022:
Fees earned or paid in cash | Stock Awards | Option Awards | Total | |||||||||||||
| Name | ($) | ($)(1) | ($)(1) | ($) | ||||||||||||
| Current Directors: | ||||||||||||||||
| Elizabeth M. Caveness | - | - | ||||||||||||||
| Alan H. Channing | - | - | ||||||||||||||
| Jeffrey A. Coleman | - | - | ||||||||||||||
| Richard M. Levychin | - | - | - | - | ||||||||||||
| (1) | The amounts in this column represent the aggregate grant date fair value of the options to purchase common stock calculated in accordance with Accounting Standards Codification (“ASC”) 718, under the assumptions included in Note 13 to our audited financial statements for the year ended December 31, 2022, included in this Report. As of December 31, 2022: there were no options to purchase our common stock outstanding that were awarded to any director as compensation. |
| ITEM 12. | SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth the beneficial ownership of our common stock as of March 31, 2023 by (i) each person known by us to be the beneficial owner of more than 5% of our outstanding common stock, (ii) each of our directors, (iii) each of our executive officers named in the table under “Executive Compensation — Summary Compensation Table,” and (iv) all of our directors and executive officers as a group. Except as otherwise indicated in the footnotes to the table, (i) the persons and entities named in the table have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws where applicable, and (ii) the address of each person is c/o Clearday, Inc., 8800 Village Drive, 2nd Floor, San Antonio, Texas 78217.
| 49 |
| Name | Number of Shares (1) | Percentage Ownership | ||||||
| Directors and Officers: | ||||||||
| James T. Walesa | ||||||||
| Common Stock | 3,053,827 | 12.1 | % | |||||
| Series F Preferred Stock | 295,717 | 5.8 | % | |||||
| Total Beneficial Ownership of Common Stock | 6,711,206 | 17.9 | % | |||||
| BJ Parrish | % | |||||||
| Common Stock | 302,329 | 1.2 | % | |||||
| Series F Preferred Stock | 24,236 | * | % | |||||
| Total Beneficial Ownership of Common Stock | % | |||||||
| Linda Carrasco | ||||||||
| Common Stock | 5,976 | * | % | |||||
| Total Beneficial Ownership of Common Stock | 5,976 | * | % | |||||
| John Bergeron | ||||||||
| Common Stock | - | * | % | |||||
| Total Beneficial Ownership of Common Stock | - | * | % | |||||
| Richard Morris | ||||||||
| Common Stock | 511,561 | 2.0 | % | |||||
| Total Beneficial Ownership of Common Stock | 511,561 | * | % | |||||
| Gary Sawina | ||||||||
| Common Stock | 3,585 | * | % | |||||
| Total Beneficial Ownership of Common Stock | 7,154 | * | % | |||||
| Elizabeth Caveness | ||||||||
| Common Stock | - | * | % | |||||
| Total Beneficial Ownership of Common Stock | 28,894 | * | % | |||||
| Alan H. Channing | ||||||||
| Common Stock | 100,698 | * | % | |||||
| Series F Preferred Stock | 45,474 | * | % | |||||
| Total Beneficial Ownership of Common Stock | 586,197 | 1.6 | % | |||||
| Jeffrey W. Coleman | ||||||||
| Common Stock | - | * | % | |||||
| Series F Preferred Stock | - | * | % | |||||
| Total Beneficial Ownership of Common Stock | 310,323 | * | % | |||||
| Richard Levychin | ||||||||
| Common Stock | - | * | % | |||||
| Series F Preferred Stock | - | * | % | |||||
| Total Beneficial Ownership of Common Stock | - | * | % | |||||
| All directors and executive officers as a group (10 persons) | ||||||||
| Clearday Common Stock | 3,977,976 | 15.8 | % | |||||
| Clearday Series F Preferred Stock | 365,428 | 3.0 | % | |||||
| Total Beneficial Ownership of Common Stock | 8,608,214 | 23.0 | % | |||||
| Beneficial Owner of 5% or more | ||||||||
| Cibolo Creek Partners, LLC (^) | ||||||||
| Clearday Common Stock | 1,884,276 | 7.5 | % | |||||
| Clearday Series F Preferred Stock | 612,402 | 5.0 | % | |||||
| Total Beneficial Ownership of Common Stock | 3,344,644 | 8.9 | % | |||||
| Thinktiv, Inc. (^^) | ||||||||
| Common Stock | 4,706,192 | 18.7 | % | |||||
| Series F Preferred Stock | - | * | % | |||||
| Total Beneficial Ownership of Common Stock | 4,706,192 | 12.6 | % | |||||
| 50 |
The only voting securities are the (1) common stock and (2) the Series F Preferred Stock.
Beneficial ownership includes the shares of common stock held by such holder and those shares that would be issued to such holder upon exercise or conversion of any of the following securities into shares of our common stock at the sole option of the holder within 60 days: (1) Series F Preferred stock; (2) options or warrants; (3) AIU Alt Care Preferred, (4) Clearday OZ LP Interests, and (5) convertible notes. There are no options outstanding as of December 31, 2022, or March 31, 2023. The warrants, AIU Alt Care Preferred, Clearday OZ LP Interests and convertible notes are not a voting security of Clearday, Inc. Total Beneficial Ownership of Common Stock is computed assuming that all such securities of such holder are exchanged or converted to common stock and the percentage is computed by dividing such amount by the 37,412,588 shares of common stock outstanding assuming that the Series F Preferred stock (including the accruals for full amount of dividends) are converted in full.
| * | Represents beneficial ownership of such security of less than 1%. | |
| ^ | Address of Cibolo Creek Partners, LLC is 200 N. Loraine St, Suite 1515, Midland, TX 79701. The managers of Cibolo Creek Partners, LLC are B.J. Parrish, H.H. Wommack, III, George Wommack and J. Steven Person. No such individual is to be construed as an admission that such person is, for the purposes of sections 13(d) or 13(g) of the Act, the beneficial owner of any securities owned by Cibolo Creek Partners, LLC. Cibolo Creek Partners, LLC is managed by a board of managers of at least three individuals. In accordance with the Staff of the SEC no-action letter re The Southland Corp. (August 10, 1987), which gives rise to the so-called “rule of three,” and holds that, where voting and investment decisions regarding an entity’s portfolio securities are made by three or more individuals, and a voting or investment decision requires the approval of a majority of those individuals, then none of the individuals, in this case the managers of the Cibolo Creek Partners, LLC, is deemed a beneficial owner of such entity’s portfolio securities. | |
| ^^ | Address of Thinktiv, Inc. is 1011 San Jacinto Blvd Suite 202, Austin, TX 78701. | |
| (1) | The shares of common stock that are included in the beneficial ownership with respect to the holdings by such holder of AIU Alt Care Preferred and Clear OZ LP Interests are computed using a conversion price computed as of March 31, 2023, equal to $0.47 or 80% of the 20 day volume average weighted price of $.59 per share computed as of such date. |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Our Chief Executive Officer has guaranteed certain of our loan obligations and the lease that we entered for our adult day care center. He will receive a guaranty fee payable in our common stock that is equal to 1% of the amount guaranteed.
One of our executives has guaranteed certain of our loan obligations and will receive a guaranty fee payable on our common stock. She may be considered related to our Chief Executive Officer as they share the same residence. She also receives compensation as our Director of Education.
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 not been paid and has granted us the right to purchase these robots. Mr. Morris has also made other loans to the Company during 2022 and is owed approximately $318,175 in the aggregate for loans and rent of approximately $62,300 for rental payments regarding our robots and is owed additional amounts for certain other advances and reimbursements.
Related parties of the Company, including our Chief Executive Officer and our General Counsel, have from time to time made an unsecured non-interest bearing advances that are due upon demand. On December 30, 2022, we issued our Chief Executive Officer $1,000,000 of shares of our common stock at a price per share of $0.67551 in exchange for obligations owed by us to this individual.
We use the services of Galleros Robinson, Certified Public Accountants, LLP, a CPA and Advisory firm, for certain accounting services in the ordinary course. Richard Levychin is a partner of this firm. We paid this firm approximately $37,500 during 2022 and accrued an accounts payable of approximately $10,500 as of December 31, 2022.
Approval of Related Party Transactions
The foregoing transactions were approved by the independent members of the Board without the related party having input with respect to the discussion of such approval. In addition, the Board believes that the foregoing transactions were necessary for our business and each such transaction were on terms no less favorable to us than would reasonably be expected to be obtained from independent third parties. Our policy requiring that independent directors approve any related party transaction is not evidenced in writing but has been the Company’s consistent practice.
| 51 |
Director Independence
Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the Company or any other individual having a relationship that, in the opinion of the Company’s Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:
| ● | the director is, or at any time during the past three years was, an employee of the Company; | |
| ● | the director or a family member of the director accepted any compensation from the Company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service); | |
| ● | a family member of the director is, or at any time during the past three years was, an executive officer of the Company; | |
| ● | the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the Company made, or from which the Company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions); | |
| ● | the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the Company served on the compensation committee of such other entity; or | |
| ● | the director or a family member of the director is a current partner of the Company’s outside auditor, or at any time during the past three years was a partner or employee of the Company’s outside auditor, and who worked on the Company’s audit. |
We have determined, based on the foregoing definition, that a majority of the directors of our Board are independent, and that such directors are Elizabeth Caveness, Alan H. Channing, Jeffrey A. Coleman and Richard Levychin.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Our Audit Committee regularly reviews and determines whether specific non-audit projects or expenditures with our independent registered public accounting firm potentially affect its independence. Our Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by our public accounting firm. Pre-approval is generally provided by our Audit Committee for up to one year, as detailed as to the particular service or category of services to be rendered and is generally subject to a specific budget. Our Audit Committee may also pre-approve additional services of specific engagements on a case-by-case basis.
The following table sets forth the aggregate fees billed to us by our public accounting firms for 2022 and 2021, all of which were pre- approved by our Audit Committee:
Year Ended December 31,
| 2022 | 2021 | |||||||
| Turner, Stone & Company, L.L.P | ||||||||
| Audit fees | $ | 250,000 | $ | 200,000 | ||||
| All other fees | 0 | 0 | ||||||
| Total Fees | $ | 250,000 | $ | 200,000 | ||||
| 52 |
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) Financial Statements
(b) Financial Statement Schedules
All consolidated financial statement schedules are included in the footnotes to the financial statements, are inapplicable, or otherwise not required.
| 53 |
(c) Exhibits
| Exhibit No. | Description |
| 1. | Exhibits |
| 54 |
| 55 |
| 56 |
| 57 |
| 58 |
| 59 |
| 60 |
| 61 |
| 62 |
| 63 |
| 64 |
* Filed herewith
^ Furnished, not filed
+ This exhibit is a management contract or compensatory plan or arrangement.
| (a) | Exhibits. See Item 15(a) above. |
| ITEM 16. | FORM 10-K SUMMARY |
None.
| 65 |
Your Vision Our Focus
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Clearday, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Clearday, Inc. as of December 31, 2022 and 2021, and the related consolidated statements of operations, mezzanine equity, convertible preferred stock and stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Clearday, Inc. as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the entity will continue as a going concern. As discussed in Note 1 to the financial statements, the entity has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to Clearday, Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Clearday, Inc. is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole8, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Turner, Stone & Company, L.L.P. |  |
| Accountants and Consultants | |
| 12700 Park Central Drive, Suite 1400 | |
| Dallas, Texas 75251 | |
| Telephone: 972-239-1660 ⁄ Facsimile: 972-239-1665 | |
| Toll Free: 877-853-4195 | |
| Web site: turnerstone.com | INTERNATIONAL ASSOCIATION OF ACCOUNTANTS AND AUDITORS |
| F-1 |
Critical Audit Matter Description
As disclosed in Notes 2, 6 and 12 to the financial statements, the Company had various debt instruments which included conversion features requiring bifurcation and separate accounting. Management evaluated the required accounting, significant estimates, and judgements around the valuation for these embedded derivatives. These embedded derivatives were initially measured at fair value and have subsequently been remeasured to fair value at each reporting period.
There is no current observable market for these types of features and, as such, the Company determined the fair value of the embedded derivatives using an option pricing model to measure the fair value of the bifurcated derivative. As a result, a high degree of auditor judgment and effort was required in performing audit procedures to evaluate the conclusions reached by management as well as the inputs to the Company’s option pricing model.
How the Critical Audit Matter Was Addressed In the Audit
Our principal audit procedures performed to address this critical audit matter included the following:
| - | We obtained an understanding of the controls and processes surrounding the evaluation, initial measurement and revaluation of the bifurcated derivatives. | |
| - | We evaluated management’s assessment and the conclusions reached to ensure these instruments were recorded in accordance with the relevant accounting guidance. | |
| - | We evaluated the fair value of the bifurcated derivatives that included testing the valuation models and assumptions utilized by management. We reviewed and tested the fair value model used, significant assumptions, and underlying data used in the model. |
/s/
We have served as Clearday, Inc.’s auditor since 2022.
May 25, 2023
| F-2 |
Clearday, Inc.
Consolidated Balance Sheets
| December 31, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Other current assets | ||||||||
| Total current assets | $ | $ | ||||||
| Patents and development | ||||||||
| Operating lease right-of-use assets | ||||||||
Land and buildings | ||||||||
Leasehold improvements | ||||||||
| Furniture fixtures & equipment | ||||||||
| Work in progress | ||||||||
| Intangible assets | ||||||||
| Other long-term assets | ||||||||
| Non-current assets held for sale | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES, MEZZANINE EQUITY, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Derivative liabilities | ||||||||
| Accrued interest | ||||||||
| Due to related parties | ||||||||
| Deferred revenue | ||||||||
| Current portion long-term debt | ||||||||
| Notes payable | ||||||||
| Operating lease liabilities | ||||||||
| Other current liabilities | ||||||||
| Current liabilities related to assets held for sale | ||||||||
| Total current liabilities | $ | $ | ||||||
| Long-term liabilities: | ||||||||
| Operating lease liabilities | ||||||||
| Long-term debt, less current portion, net | ||||||||
| Non-current liabilities related to assets held for sale | ||||||||
| Total liabilities | $ | $ | ||||||
| Commitments and contingencies (Note 7) | ||||||||
| Mezzanine equity | ||||||||
| Series F | $ | $ | ||||||
Stockholders’ deficit | ||||||||
| Preferred Stock, $ par value, shares authorized | ||||||||
| Series A Convertible Preferred
Stock, $ par value, shares authorized, and shares issued and outstanding, as of December 31, 2022
and December 31, 2021, respectively. Liquidation value of $ | ||||||||
| Common Stock, $par value, and shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Clearday, Inc. Stockholders’ deficit: | ( | ) | ( | ) | ||||
| Non-controlling interest in subsidiaries | ||||||||
| Total deficit | $ | ( | ) | $ | ( | ) | ||
| TOTAL LIABLITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ DEFICIT | $ | $ | ||||||
See accompanying notes to the audited consolidated financial statements.
| F-3 |
Clearday, Inc.
Consolidated Statements of Operations
| December 31 | ||||||||
| 2022 | 2021 | |||||||
| REVENUES | ||||||||
| Resident fee revenue, net | $ | $ | ||||||
| Adult day care | ||||||||
| Commercial property rental revenue | ||||||||
| OPERATING EXPENSES | ||||||||
| Wages & general operating expenses | ||||||||
| Selling, general and administrative expenses | ||||||||
| Loss on impairment | ||||||||
| Depreciation expense | ||||||||
| Amortization of right of use assets | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other (income) expenses | ||||||||
| Interest expense | ||||||||
| PPP loan forgiveness | ( | ) | ( | ) | ||||
| Derivative financing costs | ||||||||
| Fair value of derivatives | ||||||||
| Extinguishment of debt | ( | ) | ||||||
| Early lease termination fee | ||||||||
| Gain on disposal of assets | ( | ) | ||||||
| Gain on sales of investments | ( | ) | ||||||
| Gain on the termination of a lease | ( |
) | ||||||
| Other (income)/expenses | ( | ) | ( | ) | ||||
| Total other (income)/expenses | ( | ) | ||||||
| Net loss from continuing operations | ( | ) | ( | ) | ||||
| Income from discontinued operations, net of tax | ||||||||
| Net loss attributable to Clearday’s stockholders | $ | ( | ) | $ | ( | ) | ||
| Net loss attributable to non-controlling interest | ( | ) | ||||||
| Preferred stock dividend | ( | ) | ( | ) | ||||
| Net loss available to common stockholders | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted loss per share attributable to Clearday, Inc. | ||||||||
| Net loss from continued operations | $ | ( | ) | $ | ( | ) | ||
| Net loss/income from discontinued operations | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares basic and diluted outstanding | ||||||||
See accompanying notes to the audited consolidated financial statements.
| F-4 |
Clearday, Inc.
Consolidated Statements of Mezzanine Equity, Convertible Preferred Stock and Stockholders’ Deficit
| Mezzanine Equity Series F Preferred Stock | Preferred Stock Series A | Common Stock | Additional Paid- in | Accumulated | Clearday, Inc. Stockholders’ | Non-Controlling | Total Stockholders’ | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||
| Stock compensation for services | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with reverse merger | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series I Convertible Preferred Stock in subsidiary | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| PIK dividends on Convertible Preferred Stock F | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Issuance of partnership units in subsidiary | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Redemption of fractional shares | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Warrants Issued for Service | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||
| Mezzanine Equity Series F Preferred Stock | Preferred Stock Series A | Common Stock | Additional Paid- in | Accumulated | Clearday, Inc. Stockholders’ | Non-Controlling | Total Stockholders’ | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||
| PIK dividends accruals on Convertible Preferred Stock F | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Series F Incentive Common Stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Accrued of series I Convertible Preferred Stock in subsidiary | ||||||||||||||||||||||||||||||||||||||||||||
| Derivative Payment discount | ||||||||||||||||||||||||||||||||||||||||||||
| Stock Compensation for services | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for Loan | ||||||||||||||||||||||||||||||||||||||||||||
| Redemption of series F shares | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Officer Compensation and debt conversion | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
See accompanying notes to the audited consolidated financial statements.
| F-5 |
Clearday, Inc.
Consolidated Statements of Cash Flows
| December 31, 2022 | December 31, 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Loss from discontinued operations, net of tax | ( | ) | ||||||
| Loss from continued operations | ( | ) | ( | ) | ||||
| Adjustments required to reconcile net loss to cash flows used in operating activities | ||||||||
| Depreciation expense | ||||||||
| Amortization of right of use assets | ||||||||
| Stock based compensation | ||||||||
| Shares issued for loan commitment | ||||||||
| Financing costs from derivative liabilities | ||||||||
| Gain on termination of lease | ( | ) | ||||||
| Net loss attributed to non-controlling interest in subsidiaries | ( | ) | ||||||
| Impairment of assets | ||||||||
| Amortization of derivative discount | ||||||||
| Series I preferred stock accumulated dividend | ||||||||
| Change in fair value of the derivative | ||||||||
| Allowance for doubtful accounts | ||||||||
| Amortization of debt issuance costs | ||||||||
| Gain of PPP loan forgiveness | ( | ( | ) | |||||
| Extinguishment of debt | ( | ) | ||||||
| Redemption of fractional shares | ( | ) | ||||||
| Loss (gain) on the sale of fixed assets | ( | ) | ||||||
| Loss of patents | ||||||||
| Warrants issues for services | ||||||||
| Unrealized gain on securities | ||||||||
| Changes in operating assets and liabilities | - | - | ||||||
| Accounts receivable | ||||||||
Other current assets | ||||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ||||||||
| Accrued interest | ( | ) | ||||||
| Accrued liabilities | ||||||||
| Deferred revenue | ( | ) | ||||||
| Due to relate parties | ||||||||
| Other non-current assets | ( | ) | ||||||
| Other current liabilities | ( | ) | ||||||
| Change in operating lease liability | ( | ) | ||||||
| Net cash used in activities of continuing operations | ( | ) | ( | ) | ||||
| Net cash provided by operating activities of discontinued operations | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Payments for property and equipment | ( | ) | ( | ) | ||||
| Proceeds from PP&E | ||||||||
| Proceeds from TIC interest | ||||||||
| Proceeds from sale of non-consolidated subsidiary: | ||||||||
| Payment for capitalized software costs | ( | ) | ||||||
| Payment for acquisitions | ( | ) | ||||||
| Net cash provided by (used in) investing activities of the continuing operations | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayment of debt | ( | ) | ( | ) | ||||
| Proceeds from long-term debt | ||||||||
| Payments on lease obligations | ( | ) | ||||||
| Payments on debt issuance costs | ( |
) | ||||||
| Borrowings on debt, net | ||||||||
| Cash received from merger transaction | ||||||||
| Proceeds from sale of preferred stock and member units in subsidiary | ||||||||
| Net cash provided by in financing activities | ||||||||
| Change in cash and restricted cash from continuing operations | ( | ) | ( | ) | ||||
| Change in cash and restricted cash from discontinued operations | ||||||||
| Cash and restricted cash at beginning of the year | ||||||||
| Cash and restricted cash at end of year | $ | $ | ||||||
| Reconciliation of cash and restricted cash consist of the following: | ||||||||
| End of period | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| Total cash and restricted cash | $ | $ | ||||||
| Beginning of period | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| Total cash and restricted cash | $ | $ | ||||||
| Supplemental disclosures of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | ||||||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| Debt to equity of non-controlling interest | $ | $ | ||||||
| Preferential interest in real estate for shares issues by STI | ||||||||
| Purchase of internally developed software with accounts payable | ||||||||
| Debt converted to equity | ||||||||
| Early lease termination fee | ||||||||
| Settlements on derivative liability | ||||||||
| Converted Preferred Shares Series F to Common Shares | ||||||||
| PIK dividends for Series F preferred shares | ||||||||
| Debt discount on derivative liability | ||||||||
| Transfer of discontinued operations (non-current assets held for sale to PPE) | ||||||||
| Transfer of discontinued operations from liabilities related to assets held for sale to accrued expense and long-term debt | $ | $ | ||||||
The accompanying notes are an integral part of these audited consolidated financial statements.
| F-6 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
1. Organization, Description of Business, Basis of Presentation, Liquidity 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 AIU Merger was described in the Registration Statement (“AIU 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 AIU Merger Registration Statement, after the AIU Merger, the Company continued the businesses of AIU and continued one of the businesses of the Company related to its Sapphire Cryocooler and its related patents and intellectual property. AIU was incorporated on December 20, 2017, and began its business on December 31, 2018 when it acquired the businesses of certain private funds that operate five (5) memory care residential facilities and other businesses (the “2018 Acquisition”), including commercial real estate and hospitality assets from related parties. The memory care business is conducted through the Memory Care America LLC subsidiary (“MCA”), which has been in the residential care business since November 2010 and has been managed by the Company’s executives for approximately 5 years. Since the 2018 Acquisition, the Company has been developing innovative care and wellness products and services focusing on the longevity market.
All of the Company’s assets that were acquired in the 2018 Acquisition and are not related to the memory care facilities, or the non-acute care and wellness industry were designated as non-core businesses and held for disposition. Accordingly, such assets and liabilities are classified as held for sale in the audited consolidated balances sheets as of December 31, 2021, but reclassed out of assets held for sale in 2022. Additionally, the results of operations for these non-core businesses are classified as income from discontinued operations within the audited consolidated statements of operations for the years ended December 31, 2021, but discontinued in 2022.
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19, which spread throughout the U.S. and the world, as a pandemic and has had a significant impact on the global economy, resulting in rapidly changing market and economic conditions. National and local governments around the world instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain non-essential businesses, curfews, shelter-in-place orders and recommendations to practice social distancing. The governmental response includes additional protocols for the health and safety of residents and staff in the Company’s facilities. The outbreak and associated restrictions on travel that have been implemented have had a material adverse impact on the Company’s business and cash flow from operations, similar to many businesses. The Company has begun, and intends to continue, to resume normal operations. However, the Delta Variant of the COVID-19 has become the predominant COVID-19 strain in the United States and has put a renewed focus on prevention and has caused many governments and other authorities to re-institute preventive measures to mitigate the risk of hyperlocal outbreaks. The total impact of COVID-19 is unknown and may continue as the rates of infection, including of the Delta Variant, have increased in Texas and many other states in the U.S. As a result, management has concluded that there was a long-lived asset impairment triggering event during 2021, which required management to perform an impairment evaluation. See Note 5 “Discontinued Operations” in 2021 for additional discussion and results. There were no impairment charges taken in 2022.
Merger between Allied Integral United, Inc and AIU Special Merger Company, Inc and Name Change
On September 9, 2021,
| ● | The AIU Merger was completed. | |
| ● | In
connection with, and prior to completion of, the Merger, the Company (1) effected a | |
| ● | A special distribution for the issuance and delivery of approximately |
| F-7 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Under the terms of the AIU Merger:
| ● | ||
| ● | Clearday
assumed the obligation to issue its shares of Common Stock with respect to the (1) |
The AIU Merger was accounted for as a reverse asset acquisition in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Under this method of accounting, AIU was deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the facts that, immediately following the Merger: (i) AIU’s stockholders owned a substantial majority of the voting rights in the combined company, (ii) AIU designated a majority of the members of the initial board of directors of the combined company, and (iii) AIU’s senior management holds all key positions in the senior management of the combined company. As a result, as of the closing date of the Merger, the net assets of the Company were recorded at their acquisition-date relative fair values in the accompanying consolidated financial statements of the Company and the reported operating results prior to the Merger are those of AIU.
Liquidity and Going Concern
The Company has incurred significant cumulative
consolidated operating losses and negative cash flows. As of December 31, 2022, the Company has an accumulated deficit of $(
| F-8 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
For the period ended December 31, 2022, the Company entered certain financing transactions that are designated as the sale or forward sale of revenues from the MCA residential fees. The repayment of these financing transactions range from 210 days to one year. We have stopped paying on these loans which has resulted in several lawsuits (See “Note 6 – Indebtedness”)
For
the period ended December 31, 2021, the Company sold undivided interests, representing
2. Summary of Significant Accounting Policies
Principles of Consolidation.
The
accompanying audited consolidated financial statements include the accounts of the Company, including its wholly owned subsidiaries.
In 2019, AIU Alternative Care, Inc., a Delaware corporation (“AIU Alt Care”) and Clearday Alternative Care Oz Fund, L.P,
a Delaware limited partnership (“Clearday OZ Fund”), were formed. The Company owns all of the voting interests of AIU Alt
Care and the sole general partner of Clearday OZ Fund, and less than
In November 2019, AIU Alt Care filed a certificate
of designation that authorized preferred stock designated as the Series I
In October 2019, AIU Alt Care formed AIU Impact Management,
LLC and Clearday OZ Fund were formed. AIU Impact Management, LLC manages Clearday OZ Fund as its general partner, owns
The exchange rate for each of the Alt Care Preferred
Stock and the Clearday OZ LP Interests are equal to (i)
The Company reports its non-controlling interest in subsidiaries as a separate component of equity in the audited 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 audited consolidated statement of operations.
| F-9 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Basis of Presentation.
The Company’s audited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). The accompanying audited consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications.
Certain prior period amounts have been reclassified on the accompanying audited consolidated statements to conform to the current year presentation. This reclassification had no effect on previously reported net income (loss), deficit or cash flows from operating activities.
Classification of Convertible Preferred Stock.
The
Company applied ASC480, 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.
Use of Estimates.
The preparation of 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 consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Management believes that these estimates and assumptions are reasonable, however, actual results may differ and could have a material effect on future results of operations and financial position.
The impact of the COVID-19 pandemic could continue to have a material adverse effect on the Company’s business, results of operations, financial condition, liquidity and prospects in the near-term and beyond 2020. While management has used all currently available information in its forecasts, the ultimate impact of the COVID-19 pandemic on its results of operations, financial condition and cash flows is highly uncertain, and cannot currently be accurately predicted. The Company’s results of operations, financial condition and cash flows are dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, such as a lengthy or severe recession or any other negative trend in the U.S. or global economy and any new information that may emerge concerning the COVID-19 outbreak and the actions to contain it or treat its impact, which at the present time are highly uncertain and cannot be predicted with any accuracy.
Significant estimates in our consolidated financial statements relate to valuation of stock-based compensation, internally developed software, assets held for sale, impairment of long-lived assets and allocations related to the AIU Merger.
| F-10 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Fair Value Measurement
ASC Topic 820, “Fair Value Measurement”, requires that certain financial instruments be recognized at their fair values at our balance sheet dates. However, other financial instruments, such as debt obligations, are not required to be recognized at their fair values, but GAAP provides an option to elect fair value accounting for these instruments. GAAP requires the disclosure of the fair values of all financial instruments, regardless of whether they are recognized at their fair values or carrying amounts in our consolidated balance sheets. For financial instruments recognized at fair value, GAAP requires the disclosure of their fair values by type of instrument, along with other information, including changes in the fair values of certain financial instruments recognized in income or other comprehensive income. For financial instruments not recognized at fair value, the disclosure of their fair values is provided below under “Financial Instruments.”
Nonfinancial assets, such as property, plant and equipment, and nonfinancial liabilities are recognized at their carrying amounts in the Company’s consolidated balance sheets. GAAP does not permit nonfinancial assets and liabilities to be remeasured at their fair values. However, GAAP requires the remeasurement of such assets and liabilities to their fair values upon the occurrence of certain events, such as the impairment of property, plant and equipment. In addition, if such an event occurs, GAAP requires the disclosure of the fair value of the asset or liability along with other information, including the gain or loss recognized in income in the period the remeasurement occurred.
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
The Company did not have any Level 1 or Level 2 assets and liabilities at December 31, 2022 or 2021. The Derivative liabilities are Level 3 fair value measurements.
The following is a summary of activity of Level 3 liabilities for the year ended December 31, 2022:
| Balance - December 31, 2021 | $ | |||
| Additions | ||||
| Settlements | ( | ) | ||
| Change in fair value | ||||
| Balance - December 31, 2022 | $ |
Beginning on March 30, 2022, the Company issued note payable agreements which contain default provisions that contain a conversion feature meeting the definition of a derivative liability which therefore requires bifurcation. Further, pursuant to the Company’s contract ordering policy, the note issuances containing conversion features and related warrant issuances subsequent to March 30, 2022, resulted in derivative liabilities.
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 $; risk-free interest rates ranging from to ; expected volatility of the Company’s common stock ranging from % to %; exercise prices of from $ to $; and terms from three to sixty months.
Segment Reporting.
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, the Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business as one operating segment.
Cash, and Restricted Cash.
Cash, consisting of short-term, highly liquid investments and money market funds with original maturities of three months or less at the date of purchase, are carried at cost plus accrued interest, which approximates market.
Restricted cash as of December 31, 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.
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.
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.
| F-11 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act also appropriated funds for the U.S. Small Business Administration Paycheck Protection Program (“PPP”) loans that are forgivable in certain situations and employment related tax credits to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19.
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 the 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 year 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 year. 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 year, 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 Company did not have any allowance for doubtful accounts as of December 31, 2022 or 2021.
The allowance for doubtful accounts reflects estimates that the Company periodically reviews and revises based on new information, to which revisions may be material. The Company’s allowance for doubtful accounts consists of the following:
| Allowance for Doubtful Accounts | Balance at Beginning of Year | Provision for Doubtful Accounts | Write-offs | Balance at End of Year | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| December 31, 2021 | ( | ) | ||||||||||||||
Assets and Liabilities Held for Sale.
In 2021, the Company designated its real estate, other than its headquarters, and hotels as held for sale when it is probable these non-core business assets will be sold within one year. The Company recorded these assets on the audited consolidated balance sheets at the lesser of the carrying value and fair value less estimated selling costs. If the carrying value is greater than the fair value less the estimated selling costs, the Company records an impairment charge. The Company evaluates the fair value of the assets held for sale each period to determine if it has changed (See Note 5 “Discontinued Operations”). In 2022, we discontinued this accounting treatment since these assets no longer met the criteria as held for sale and were transferred back to assets held for use.
| F-12 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Property and Equipment.
Property and equipment are recorded at cost and depreciated using the straight-line basis over their estimated useful lives, which are typically as follows:
| Asset Class | Estimated Useful Life (in years) | |||
| Buildings | ||||
| Leasehold improvements | * | |||
| Equipment | ||||
| Computer equipment and software | ||||
| Furniture and fixtures | ||||
| * |
The Company regularly evaluates whether events or changes in circumstances have occurred that could indicate impairment in the value of the Company’s long-lived assets. If there is an indication that the carrying value of an asset is not recoverable, the Company determines the amount of impairment loss, if any, by comparing the historical carrying value of the asset to its estimated fair value, with any amount in excess of fair value recognized as an expense in the current period. The Company determines estimated fair value through an evaluation of recent financial performance, recent transactions for similar assets, market conditions and projected cash flows using standard industry valuation techniques. Undiscounted cash flow projections and estimates of fair value amounts are based on a number of assumptions such as revenue and expense growth rates, estimated holding periods and estimated capitalization rates (Level 3).
Valuation of Long-Lived Assets.
Long-lived
assets to be held and used, including property and equipment, right to use assets and definite life intangible assets, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. As of
December 31, 2022, there were impairments recognized by the Company. As of December 31, 2021, the Company recognized certain impairments
of $
Intangible Assets
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.
On
September 9, 2021 in connection with the AIU Merger, the Company recognized goodwill of $
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 December 31, 2022 and
December 31, 2021, $
Acquired intangible assets subject to amortization are as follows:
| December 31, 2022 | ||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted-Average Remaining Useful Life (Years) | |||||||||||
| Developed technology | $ | $ | $ | |||||||||||
Expected future amortization expense for intangible assets as of December 31, 2022 is as follows:
| Fiscal Years | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
| December 31, 2021 | ||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted-Average Remaining Useful Life (Years) | |||||||||||
| Developed technology | $ | $ | $ | |||||||||||
| F-13 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Gain (Loss) on Sale of Assets.
In 2021, the Company entered into real estate transactions which may include the disposal of certain commercial shopping centers and hotels, including the associated real estate; such transactions are recorded in Note 5 “Discontinued Operations.” The Company recognizes gain or loss on these property sales when the transfer of control is complete. The Company recognizes gain or loss from the sale of equity method investments when the transfer of control is complete, and the Company has no continuing involvement with the transferred financial assets.
Legal Proceedings and Claims.
The Company has been, is currently, and expects in the future to be involved in claims, lawsuits, and regulatory and other government audits, investigations and proceedings arising in the ordinary course of the Company’s business, some of which may involve material amounts. The Company establish accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Also, the defense and resolution of these claims, lawsuits, and regulatory and other government audits, investigations and proceedings may require the Company to incur significant expense. The Company accounts for claims and litigation losses in accordance with FASB, Accounting Standards Codification™, or ASC, Topic 450, Contingencies. Under FASB ASC Topic 450, loss contingency provisions are recorded for probable and estimable losses at the Company’s best estimate of a loss or, when a best estimate cannot be made, at the Company’s estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment, and are refined as additional information becomes known. Accordingly, the Company is often initially unable to develop a best estimate of loss and therefore the estimated minimum loss amount, which could be zero, is recorded; then, as information becomes known, the minimum loss amount is updated, as appropriate. Occasionally, a minimum or best estimate amount may be increased or decreased when events result in a changed expectation.
Lease Accounting.
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 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 ASC606 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 ASC842 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 December 31, 2022 or 2021.
ROU assets associated with operating leases are included in “Right of Use Asset” on the Company’s audited consolidated balance sheets. Current and long-term portions of lease liabilities related to operating leases are included in “Lease Liabilities, Current” and “Lease Liabilities, Long-Term” on the Company’s consolidated balance sheets as of December 31, 2022 and 2021. ROU assets represent the Company’s right to use an underlying asset for the estimated lease term and lease liabilities represent the Company’s present value of its future lease payments. In assessing its leases and determining its lease liability at lease commencement or upon modification, the Company was not able to readily determine the rate implicit for its lessee arrangements, and thus has used its incremental borrowing rate on a collateralized basis to determine the present value of the lease payments. The Company’s ROU assets are measured as the balance of the lease liability plus or minus any prepaid or accrued lease payments and any unamortized initial direct costs. Operating lease expenses are recognized on a ratable basis, regardless of whether the payment terms require the Company to make payments annually, quarterly, monthly, or for the entire term in advance. If the payment terms include fixed escalator provisions, the effect of such increases is recognized on a straight-line basis. The Company calculates the straight-line expense over the contract’s estimated lease term, including any renewal option periods that the Company deems reasonably certain to be exercised.
The Company 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.
Lessor.
The Company’s lessor arrangements primarily included tenant contracts within shopping centers, which are 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.
| F-14 |
Clearday, Inc.
Notes to Audited 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 are 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 audited consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse, while the effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The
Company can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained
upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with
a tax position is measured as the largest amount that has a
Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income, and, to the extent, the Company believes that the Company is more likely than not that all or a portion of deferred tax assets will not be realized, the Company establishes a valuation allowance to reduce the deferred tax assets to the appropriate valuation. To the extent the Company establishes a valuation allowance or increase or decrease this allowance in each period, the
Company includes the related tax expense or tax benefit within the tax provision in the audited 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 audited 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 audited 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 audited 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 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.
| F-15 |
Clearday, Inc.
Notes to Audited 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 audited 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 audited 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 audited 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
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 audited 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 years ended December 31, | ||||||||||||||||
| 2022 | % | 2021 | % | |||||||||||||
| Revenue from contracts with customers: | ||||||||||||||||
| Resident rent - over time | $ | % | $ | % | ||||||||||||
| Day care | % | % | ||||||||||||||
| Commercial property rental revenue – over time | % | % | ||||||||||||||
| Total revenue from contracts with customers | $ | $ | % | |||||||||||||
Day care revenue is from Primrose Day care center which was purchased in 2021.
Other Operating Income.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law. Under the CARES Act, the U.S. Department of Health and Human Services, or HHS, established the Provider Relief Fund. The Provider Relief Fund was further supplemented on December 27, 2020, by the Consolidated Appropriations Act, 2021. Retention and use of the funds received under the CARES Act are subject to certain terms and conditions, including certain reporting requirements. Other operating income includes income recognized for funds received pursuant to the Provider Relief Fund of the CARES Act for which the Company has determined that it followed the terms and conditions of the Provider Relief Fund of the CARES Act. The Company recognized other operating income in its consolidated statements of operations to the extent it had estimated that it had COVID-19 incurred losses or related costs for which provisions of the CARES Act are intended to compensate. The amount of income recognized for these estimated losses and costs is limited to the amount of funds received during the period in which the estimated losses and costs were recognized or incurred or, if funds were received subsequently, the period in which the funds were received.
During
2022, the Company did not receive any HHS grants. During the year ended December 31, 2021, the Company received HHS Government grants
amounting to $
| F-16 |
Clearday, Inc.
Notes to Audited 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 Paycheck Protection Program loans (PPP loans) under the Small Business Administration as debt instruments in accordance with ASC470, 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 consolidated balance sheets is accounted for in accordance with U.S. GAAP regarding the presentation of assets and liabilities, whereas the portion of the loan due within 12 months from year end will be considered a current liability and the remaining portion will be considered a long-term liability. Also, under this guidance, a borrower should not recognize any income from the extinguishment of its debt until the borrower has been legally released as the primary obligor under the loan. In addition, the forgiveness of PPP loans as income has been recorded as other income and not included in income from operations based on the unprecedented nature of COVID-19.
ERTC Funds.
The Company is eligible to claim the employee retention
tax credit (“ERTC”) for certain of our employees under the CARES act. The refundable tax credit for 2021 is available to
employers that fully or partially suspend operations during any calendar quarter in 2021 due to orders from an appropriate governmental
authority limiting commerce, travel, or group meetings due to COVID-19, and is equal to 70% of qualified wages paid after March 12, 2020,
through December 31, 2020, to qualified employees, with a maximum credit of $
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.
| F-17 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Recently Issued Accounting Pronouncements.
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 audited consolidated financial statements.
For all other modifications or exchanges, the effect should be measured as the excess, if any, of the fair value of the modified or exchanged written call option over the fair value of that written call option immediately before it is modified or exchanged for all other modifications or exchanges. The amendments require entities to recognize the effect based on the substance of the transaction, in the same manner as if cash had been paid as consideration. The amendments also require entities to recognize the effect in accordance with the guidance in Topic 718, Compensation - Stock Compensation. ASU No. 2021-04 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. ASU 2021-04 was adopted on January 1, 2022. The Company has assessed the impact that the adoption of this ASU has had on its audited consolidated financial statements and determined that such adoption did not have a material effect.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
AIU Merger.
On September 9, 2021, the Company completed the AIU Merger. The AIU Merger was accounted for as a reverse asset acquisition pursuant to Topic 805, Clarifying the Definition of a Business, as substantially all the fair value of the assets acquired were concentrated in a group of similar non-financial assets, and the acquired assets did not have outputs or employees.
The total purchase price paid in the Merger has been allocated to the net assets acquired and liabilities assumed based on their fair values as of the completion of the Merger. The following summarizes allocation of purchase price paid in the Merger:
| Number of shares of the combined organization owned by the Company’s pre-merger stockholders | ||||
| Multiplied by the fair value per share of Superconductor common stock | $ | |||
| Fair value of consideration issued to effect the Merger | $ | |||
| Transaction costs | ||||
| Purchase price | $ |
The allocation of the purchase price is as follows.
| Cash acquired | $ | |||
| Net assets acquired: | ||||
| Prepaid expenses | ||||
| Inventory | ||||
| Investment in AIU real estate (eliminated in consolidation) | ||||
| Accounts payable and accrued expenses | ( |
) | ||
| Accrued compensation | ( |
) | ||
| Debt assumed | ( |
) | ||
| Total net assets | ||||
| Fair value of excess of purchase price over net assets acquired – Preliminary Goodwill | ||||
| Purchase price | $ |
| F-18 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
3. Real Estate, Property and Equipment, Net
Property and equipment, net, consists of the following:
| December 31, 2022 | December 31, 2021 | |||||||
| Land | $ | $ | ||||||
| Buildings | ||||||||
| Leasehold Improvements | ||||||||
| Computers | ||||||||
| Furniture, fixtures, and equipment | ||||||||
| Other Equipment | ||||||||
| Work in progress | ||||||||
| Total: | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Real estate, property and equipment, net | $ | $ | ||||||
Non-core businesses classified as assets held for sale:
| December 31, 2022 | December 31, 2021 | |||||||
| Land | $ | $ | ||||||
| Building and building improvements | ||||||||
| Furniture, fixtures, and equipment | ||||||||
| Other | ||||||||
| Total | ||||||||
| Less accumulated depreciation | ( |
) | ||||||
| Real estate, property and equipment, net | $ | $ | ||||||
The
Company recorded depreciation expenses relating to real estate, property, and equipment for the Company’s memory care facilities
and corporate assets in the amount of $
The Company has reviewed the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If there is an indication that the value of an asset is not recoverable, the Company determines the amount of impairment loss, if any, by comparing the historical carrying value of the asset to its estimated fair value. The Company determined estimated fair value based on input from market participants, the Company’s experience selling similar assets, market conditions and internally developed cash flow models that the Company’s assets or asset groups are expected to generate, and the Company considers these estimates to be a Level 3 fair value measurement.
| F-19 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
4. Leases
The Company follows ASC842, as discussed in Note 2 “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 audited 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.
During 2022, the
Company leased three memory care facilities from MHI-MC San Antonio, LP, MHI-MC Little Rock, LP, and MHI-MC New Braunfels, LP (collectively
“MHI entities”) under three separate lease agreements and originally recorded a right of use asset and a lease liability
of $
As
of December 31, 2021, the Company leased one memory care facility from MC-Simpsonville, SC-1-UT, LLC (the “Simpsonville Landlord”)
under a 15-year non-cancelable lease agreement. Provided the Company is not in default, the lease agreement has three successive five-year
renewal options and has the right of first refusal to acquire the Simpsonville Landlord’s interest in the property in certain situations.
Beginning January 2019, the Company ceased paying the Simpsonville Landlord rent. The Landlord filed a lawsuit against the guarantors
of the lease and on October 21, 2020, the trial court issued a final judgment of the damages for the plaintiff in the amount of $
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 audited
consolidated balance sheet following the adoption of ASC842. Weighted-average remaining lease terms and discount rate as of December
31, 2022, are
Per
ASC360-10-35-21, the Company performed an impairment test on our long-term assets, including ROU or leased assets. The New
Braunfels, Simpsonville, Naples Operating and Naples LLC facilities failed the recoverability test as set out in the accounting
standard. As a result, the New Braunfels, Simpsonville, Naples Operating and Naples LLC facilities incurred impairment charges in
the amounts of $
| F-20 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Lease Costs.
For the years ended December 31, 2022, and 2021, the lease costs recorded in the audited consolidated statement of operations, included in wages and general operating expenses, are as follows:
| For the years ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Lease costs: | ||||||||
| Operating lease costs | $ | $ | ||||||
| Short-term lease costs | ||||||||
| Total lease costs | $ | $ | ||||||
5. Discontinued Operations
The Company held two hotel properties during 2021, each of which were classified as non-core assets and had experienced an extended closure since March 2020 due to the COVID-19 pandemic, resulting in significant reductions in cash flows and ability to repay the separate mortgage loans on these properties.
SeaWorld Hotel.
During
the year ended December 31, 2021, the Company entered into an agreement with Pender Capital Asset Based Lending Fund I, L.P.
regarding the SeaWorld hotel property and transferred the property to this lender. This lender agreed to limit the aggregate
obligations under the secured obligations to the amount of the deficiency realized by the lender on the subsequent sale of the
SeaWorld hotel property, subject to an aggregate specified limit if the Company complied with the terms of the agreement. In May
2021, the lender sold the SeaWorld hotel property which created an aggregate deficiency of $
Buda Hotel.
As of May 24, 2021, the Company entered into an
agreement for the sale of the Buda hotel property amounting to $
The Company previously recognized an impairment provision
amounting to $
The sale of the Buda hotel
property completes the sale of all the Company’s hotel properties and relieves approximately $
| F-21 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
During
the year ended December 31, 2021, the Company sold two non-core assets: The two hotel properties were owned separately by two of the
Company’s subsidiaries in San Antonio, Texas. Hotel Property #1 was sold with proceeds of $
Hotel Property #1 | Hotel Property #2 | Total 2021 | ||||||||||
| Contract sales price | $ | $ | $ | |||||||||
| Fees | ( | ) | ||||||||||
| Seller buildout obligation | ||||||||||||
| Net book value of assets | ( | ) | ( | ) | ( | ) | ||||||
| Gain/(loss) on sale of assets | $ | $ | $ | |||||||||
The following statements are the consolidated balance sheets and income statements for the Company’s discontinued operations as of December 31, 2021, there were no assets classified as Discontinued Operations as of December 31, 2022:
| December 31, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Due from related parties | ||||||||
| Investments in non-consolidated entities | ||||||||
| Note Receivables | ||||||||
| Real estate, property and equipment, net | ||||||||
| Total long-term assets held for sale | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Accrued interest | ||||||||
| Current portion of long-term debt | ||||||||
| Due to related parties | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Note payable | ||||||||
| Long-term debt, less current portion | ||||||||
| Total long-term liabilities held for sale | ||||||||
| TOTAL LIABILITIES | $ | $ | ||||||
| Stockholders’ Equity | ||||||||
| Total shareholders’ equity | ( | ) | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
| F-22 |
Clearday, Inc.
Notes to Consolidated Financial Statements
Years ended December 31, |
||||||||
| 2022* | 2021 | |||||||
| REVENUES | ||||||||
| Hotel room and other revenue | $ | $ | ||||||
| Commercial property rental revenue | ||||||||
| Total revenues, net | ||||||||
| Costs and expenses | ||||||||
| Operating expenses | ||||||||
| Impairment | ||||||||
| General and administrative expenses | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( |
) | ||||||
| Other/(income) expenses | ||||||||
| Interest expense | ||||||||
| Gain on disposal of assets | ||||||||
| Equity income from investees, net of applicable taxes | ||||||||
| Impairment expense (recovery) | ( |
) | ||||||
| Other (income) expenses | ||||||||
| Total (income)/expense | ||||||||
| Net (loss) income | $ | $ | ||||||
| * | There were no assets classified as Discontinued Operations as of December 31, 2022: |
6. Indebtedness
As of December 31, 2022, and December 31, 2021, the current portion of long-term debt within the Company’s audited consolidated financial statements is as stated below. The debt associated with our current portion of long-term debt within the Company’s audited consolidated financial statements for our assets held for sale is expected to be repaid primarily with the proceeds from the sales of the applicable 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 audited consolidated financial statements of $
Notes Payable
From
March 30, 2022 to December 14, 2022, the Company issued five notes payable which contained a default conversion feature meeting the definition
of a derivative liability. Pursuant to the Company’s contract ordering policy, the conversion features were valued at $
From
July 1, 2022 to September 28, 2022, the Company issued two notes payable which contained a default conversion feature meeting the definition
of a derivative liability. Pursuant to the Company’s contract ordering policy, the conversion features were valued at $
The change in the interest expense reflects primarily the impact of the repayment of debt since the beginning of the prior year period and during this period, offset in part by incurrence of indebtedness at the latter part of this period at higher and lower interest rates.
| As of December 31, | Continuing Core | Discontinued Non-Core | Total | |||||||||
| 2023 | ||||||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| 2026 | ||||||||||||
| Thereafter | ||||||||||||
| Total obligations | $ | $ | $ | |||||||||
| F-23 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
The following table summarizes the maturity of the Company’s debt as of December 31, 2022:
Indebtedness of Facilities
| Maturity | Interest | December 31, | December 31, | ||||||||||||
| Date | Rate | 2022 | 2021 | ||||||||||||
| Naples Mortgage Loan | % | ||||||||||||||
| Invesque (Lessor) Loan | % | ||||||||||||||
| Gearhart Loan (1) # | % | ||||||||||||||
| SBA PPP Loans | % | ||||||||||||||
| Bank Direct Payable | % | ||||||||||||||
| Sixth Street Lending | % | ||||||||||||||
| 1800 Diagonal | % | ||||||||||||||
| Buda 2K Hospitality LLC | % | ||||||||||||||
| Equity Secure Fund I, LLC | % | ||||||||||||||
| New Braunfels Business Loan | % | ||||||||||||||
Merchant Cash Advance Loans (2)
| Libertas Financing Agreement | | % | | ||||||||||||
| New Braunfels Samson Funding 1 | | % | | ||||||||||||
| New Braunfels Samson Group 2 | | % | | ||||||||||||
| Naples Operating LG Funding | | % | | ||||||||||||
| Naples LLC CFG Merchant Solutions | | % | | ||||||||||||
| Naples Operating PIRS Capital | % | ||||||||||||||
| Little Rock Libertas | % | ||||||||||||||
| PIRS Capital Financing Agreement | % | ||||||||||||||
| Naples Samson #1 | % | ||||||||||||||
| Naples LG Funding #2 | % | ||||||||||||||
| Little Rock Premium Funding | % | ||||||||||||||
| Little Rock KIT Funding | % | ||||||||||||||
| Little Rock Samson Funding #4 | % | ||||||||||||||
| Naples Operating SWIFT | % | ||||||||||||||
| New Braunfels Samson Cloud Fund | % | ||||||||||||||
| New Braunfels Samson Group | % | ||||||||||||||
| Westover Hills One River | % | ||||||||||||||
| Westover Hills FOX Capitol | % | ||||||||||||||
| Westover Hills Arsenal | % | ||||||||||||||
| Westover Samson Funding | % | ||||||||||||||
| Notional amount of debt | |||||||||||||||
| Less: current maturities | |||||||||||||||
| $ | $ |
| F-24 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Indebtedness Allocated to Assets Held For Sale
| Maturity | Interest | December | December | ||||||||||||
| Date | Rate | 2022 | 2021 | ||||||||||||
| Real Estate: | |||||||||||||||
| Artesia Note | Variable | $ | $ | ||||||||||||
| Tamir Note | % | ||||||||||||||
| Leander Note | % | ||||||||||||||
| Carpenter Enterprises | |||||||||||||||
| Leander Stearns National Association # | Variable | % | |||||||||||||
| Notional amount of debt | |||||||||||||||
| Less: current maturities | | ||||||||||||||
| $ | $ |
Other (Corporate) Indebtedness
| Maturity | Interest | December | December | ||||||||||||
| Date | Rate | 2022 | 2021 | ||||||||||||
| AGP Note # | % | ||||||||||||||
| Cibolo Creek Partners | % | $ | $ | ||||||||||||
| Cibolo Creek Partners promissory note | % | $ | $ | ||||||||||||
| EIDL SBA Treas 310 | % | ||||||||||||||
| Firstfire | % | ||||||||||||||
| Five C’s Loan # | % | ||||||||||||||
| GS Capital | % | ||||||||||||||
| Jefferson Street | % | ||||||||||||||
| KOBO, L.P. (3) | Variable | % | |||||||||||||
| Mast Hill #1 # | % | ||||||||||||||
| Mast Hill #2 # | % | ||||||||||||||
| Round Rock Development Partners Note | % | ||||||||||||||
| Notional amount of debt | |||||||||||||||
| Less: current maturities | |||||||||||||||
| $ | $ | ||||||||||||||
| TIC Purchase Agreements | Demand | % | - | ||||||||||||
| Other Current Liabilities | |||||||||||||||
| Related Party Payable | |||||||||||||||
| $ | $ | ||||||||||||||
| Total | $ | $ | |||||||||||||
| Less debt discount & derivatives | ( | ) | (325,000 | ) | |||||||||||
| $ | $ | 14,723,413 | |||||||||||||
| (1) | |
| (2) | |
| (3) | |
| # |
| F-25 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Naples Mortgage Loan.
On
April 29, 2021, a subsidiary of the Company executed a secured promissory note with Benworth Capital Partners, LLC in the amount of
$
Invesque (Lessor) Loan.
In
April 2021, there were three properties in which the Company had an interest and whose proceeds from any sale were pledged to the lender
in collateral to the guarantees. One of those interests, Westover Town Center, was sold and the proceeds in the amount of $
Gearhart Loan.
On April 1, 2012, a subsidiary of the
Company executed a promissory note with Betty Gearhart for $
PPP Loans.
In
May 2020, the Company was granted four separate loans under the Paycheck Protection Program (the “PPP Loans”) administered
by the United States Small Business Administration (“SBA”) established under the Coronavirus Aid, Relief, and Economic Security
(“CARES”) Act, which has enabled the Company to retain the Company’s employees during the period of disruption created
by the Coronavirus pandemic. The PPP Loans, which are evidenced by Notes issued by the Company (the “Note”), mature in May
2022 and bear interest at a fixed rate of 1.0% per annum, accruing from May 2020 (“Loan Date”) and payable monthly. The Note
is unsecured and guaranteed by the SBA. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties.
The Note provides for customary defaults, including failure to make payment when due or to fulfill the Company’s obligations under
the notes or related documents, reorganizations, mergers, Consolidations or other changes to the Company’s business structure,
and certain defaults on other indebtedness, bankruptcy events, adverse changes in financial condition or civil or criminal actions. The
PPP Loans may be accelerated upon the occurrence of a default. During 2021, the Company has received an additional $
Bank Direct Payable.
The obligations were incurred to finance insurance policy premiums such as directors and officers insurance. The amount was paid monthly.
Sixth Street Lending.
On April 5, 2022, the Company
incurred a loan with the loan of $
1800 Diagonal.
On December 20, 2022, the
Company incurred a loan for the net funding to the Company of $
| F-26 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Buda 2K Hospitality Secured Note.
On August 18, 2021, the Company through its subsidiary
that owned the Buda hotel property and a subsidiary that owns land located in Cibolo, Texas, jointly entered a secured promissory note
with 2K Hospitality, LLC, in the principal amount of $
Equity Secure Fund I, LLC.
On March 26, 2021, the Company executed a promissory
note for $
New Braunfels Business Loan.
Subsidiaries of the Company, Memory Care America, LLC, and MCA New Braunfels Operating Company, LLC on October 2, 2019 incurred a loan by ServisFirst Bank for certain equipment. This loan was secured by a blanket lien on their assets and guaranteed by James Walesa and BJ Parrish. The loan agreements had customary covenants and agreements.
Artesia Note.
On April 1, 2013, the Company executed a promissory
note with First Capital Bank of Texas, N.A. for a principal amount of $
Tamir Note.
On
March 12, 2010, the Company executed a promissory note with Tamir Enterprises, Ltd. for a principal amount of $
| F-27 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Leander Note.
On October 5, 2018, a subsidiary of the
Company executed a loan agreement with Equity Security Investments for a principal amount of $
On April 20, 2021, the subsidiary of the
Company exercised a one-year extension option on the Leander note that extends the new maturity date to
Leander Stearns National Association.
On February 10, 2022, the Company executed a loan
agreement with Stearns Bank NA for a principal amount of $
Carpenter Enterprises.
The Company received an advance from a stockholder
for a loan used to pay operating expenses. The loan amount of $
AGP Note.
The
Company entered an unsecured promissory note with A.G.P./Alliance Global Partners (“AGP”) which was the financial
adviser to AIU in connection with the AIU Merger. The $
Cibolo Creek Partners and Round Rock Development Partners.
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 other than required applicable federal rate under the Internal Revenue Code. Each of these lenders was a related party when the obligations were incurred until the date of the AIU Merger. For more information, see Note 9 “Related Party Transactions.”
EIDL SBA Treas 310.
In December 2021, the company received an Economic
Injury Disaster Loan (EIDL) in the amount of $
FirstFire.
On May 27, 2022, the Company
incurred a loan from Firstfire Global Opportunities Fund, LLC, for the net funding of $
| F-28 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Five C’s, LLC Loan.
As of April 1, 2019, The Five C’s LLC
entered into an agreement issuing capital stock that reduced obligations under an existing promissory note to $
GS Capital.
On May 20, 2022, the Company
incurred a loan under an unsecured promissory note (the “GS Note”) to GS Capital Partners LLC for proceeds of $
Jefferson Street.
On May 16, 2022, the Company
incurred a loan under an unsecured promissory note (the “Jefferson Note”) by Jefferson Street Capital LLC. This Jefferson
Note provides for the proceeds to the Company of $
KOBO Note.
On November 21, 2022, Leander Associates, Ltd.,
a wholly owned subsidiary of the Company (“Leander”) entered into a financing agreement with Kobo, LP for $
Mast Hill Loans.
On July 5, 2022, the Company closed a loan with an
institutional lender, Mast Hill Fund, L.P. (“Mast Hill”), under the terms of a Securities Purchase Agreement
dated as of July 1, 2022 and issued an unsecured promissory note in the principal amount of $
The obligations under the MH Note 1 incur interest
equal to
The Company paid Mast Hill a commitment fee (“Commitment Fee”) of our common stock (“Commitment Shares”). of Commitment Shares were issued and vested on the funding date of the MH Note 1. An additional Commitment Shares vest at a rate of shares per month.
| F-29 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
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
On September 30, 2022, the Company closed an additional
loan with Mast Hill under the terms of a Securities Purchase Agreement dated as of September 28, 2022 and issued an unsecured
promissory note in the principal amount of $
The obligations under the MH Note 2 incur interest
equal to
The Company paid Mast Hill a commitment fee (“Commitment Fee”) of our common stock (“Commitment Shares”). of Commitment Shares were issued and vested on the funding date of the MH Note 2. An additional Commitment Shares vest monthly over the term of the MH Note 2.
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
TIC Purchase Agreements.
MCA Naples, LLC, a wholly owned subsidiary
of the Company, entered into three purchase agreements to sell undivided interests in the land owned by such subsidiary and leased
to its affiliate, also a wholly owned subsidiary of the Company, for the Naples residential care community. The aggregate purchase
amount under such agreements was approximately $
Libertas Financing Agreement.
On May 25, 2021, the Company executed a merchant cash
advance loan with Libertas Funding LLC in the amount of $
| F-30 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
New Braunfels Samson Funding 1.
The
Company entered into a Futures Receipts Sale and Purchase Agreement dated as of September 28, 2021 (“Factoring Agreement 1”),
with Cloudfund LLC d/b/a Samson Group (“NB Financier 1”). Under Factoring Agreement 1, a specified percentage of its future
receipts (as defined by Factoring Agreement 1, which include the future resident revenues in the New Braunfels residential care facility
owned by MCA) were sold to NB Financier 1, which were equal to $
The
Company entered into a Revenue Purchase Agreement and Security Agreement and Guaranty of Performance dated as of September 28, 2021
(“Factoring Agreement 2”) Samson MCA LLC (“NB Financier 2”). Under Factoring Agreement 2, a specified
percentage of its future receipts (as defined by Factoring Agreement 2, which include the payments to MCA as a result of its sale of
goods and/or services such as its future resident revenues in the New Braunfels residential care facility owned by MCA), which were
equal to $
| 7. | Commitments and Contingencies |
Contingencies.
The
tenant, MCA Simpsonville Operating Company LLC, referred to as Tenant, of the MCA community that is located in Simpsonville, South Carolina,
referred to as the Simpsonville Facility, and other affiliates of the Company have a dispute with the landlord of the Simpsonville Facility,
MC-Simpsonville, SC-UT, LLC, referred to as the Landlord, and its affiliates (Embree Group of Companies: Embree Construction Group, Inc.,
Embree Asset Group, Inc., and Embree Capital Markets Group, Inc., referred to collectively as Embree) under the terms of the lease. After
non-payment, the Landlord instituted litigation (“Simpsonville Action 1”) that is captioned and numbered MC-Simpsonville,
SC-UT, LLC v. Steve Person, et. al., Cause No. 19-0651-C368 in the 368th Judicial District Court of Williamson County, Texas. After the
trial court issued a judgment on damages in the amount of $
The Landlord filed a second action on April 9, 2021 (Simpsonville Action 2), for claims similar to Simpsonville Action 1 including relief for payment of rent past due and reimbursement of taxes from October 2020 to the time of the trial in this action. This action captioned and numbered MC-Simpsonville, SC-UT, LLC v. Steve Person, James Walesa and Trident Healthcare Properties I, LP, Cause No. 21-0513-C425 in the 425th Judicial District Court of Williamson County, Texas. The court granted summary judgment in this matter in favor of the Landlord on April 14, 2023. Trident and the individual guarantors may appeal this judgement although there can be no assurance that Trident or the individual guarantors will be able prevail in any such appeal. The Landlord may pursue a final order of the court at the completion of a trial or otherwise. If such final order is granted, then subject to any appeal or other action, the Landlord may pursue to enforce the final judgement.
| F-31 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Certain
subsidiaries of the Company that operated hotel assets did not pay employment related taxes such as required withholdings for Texas State
unemployment taxes and federal income tax and employee and employer contributions for FICA (Social Security and Medicare) taxes, and
federal unemployment tax for certain periods from December 31, 2018, to December 31, 2021. These subsidiaries have since made the appropriate
filings with the Internal Revenue Service and the Company has accrued the full estimated amount of the underpaid taxes as well as the
estimated penalties and interest. As of December 31, 2022, the amount of the estimated taxes, penalties, and interest, assuming that
there is no waiver or mitigation of the penalties, is $
In
the fourth quarter of 2021, certain subsidiaries of the Company did not remit payroll taxes related to the Earned Retentions Tax
Credit (“ERTC”). The ERTC program permitted an offset for such obligations and was terminated during the fourth quarter
with an effective termination date of September 30, 2021. As a result, the Company has accrued $
Certain
subsidiaries of the Company that operate its residential care communities have not paid employment related taxes such as required withholdings
for federal income tax and employee and employer contributions for FICA (Social Security and Medicare) taxes, and federal and state unemployment
tax from and after the payroll 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 audited consolidated financial statements
as of December 31, 2022, of approximately $
Certain
subsidiaries of the Company that operate residential care facilities (“MCA Borrowers”) incurred certain financings through
merchant credit advances. Such financings were provided by creditors under agreements (“MCA Agreements”) that describe the
transaction as the sale of future receivables by the applicable MCA Borrower. The aggregate accrued amount of these financings is approximately
$
These actions are
| 1. | Premium Merchant Funding 18, LLC v Memory Care at Good Shepherd LLC and James Walesa (a guarantor), filed in state court in Kings County, New York on August 19, 2022 (summary judgement in this matter was entered in favor of the plaintiff and the Company has entered a notice to appeal); | |
| 2. | Libertas Funding LLC v. Memory Care at Good Shepherd, LLC, et. al. including James Walesa (a guarantor), filed in state court in Monroe County, New York on August 24, 2022 (summary judgement in this matter was entered in favor of the Company’s subsidiary and may be appealed by the plaintiff); | |
| 3. | Cloudfund LLC v MCA New Braunfels Operating Company LLC et. al. including James Walesa (a guarantor), filed in state court in Nassau County, New York on August 29, 2022; | |
| 4. | Cloudfund LLC v MCA Naples Operating Company, LLC and James Walesa (a guarantor), filed in state court in Nassau County, New York on August 30, 2022 (summary judgement in this matter was entered in favor of the plaintiff and the Company has have entered a notice to appeal); | |
| 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 the Company’s Chief Executive Officer, and/or Christin Hemmens, is an officer of Clearday. Other than as set forth above, each of these actions are in the pleading or discovery stage of litigation.
A
mortgage lender for the Naples, Florida facility commenced an action for nonpayment of the mortgage note. The action is captioned A.AD.A,
INC.; Anga Properties, LLC; Arce Holdings, LLC; Benfam Holdings LLC; Carolina Resources, LLC; Emilio Diaz SD Investment Account, LLC;
Michael B. and Irma B. Goldstein; David J. Gonzalez; Hersab Holdings, LLC; Indocan Investment USA Corporation; Armando Navarro; Robbia
Properties LLC; Shochat Holdings I LLC; and Wekwit, Inc. (collectively referred to as the Naples Lender) vs. MCA Naples, LLC, Case No.
11-2023-CA-000243-0001- flied in the Circuit Court in and for Collier County, Florida (the “Benworth Action”). This litigation
arises from the nonpayment under the mortgage and promissory note. The Benworth Action demands payment of the principal amount of the
promissory note of $
The
Company has been threatened with litigation by the law firm Rigrodsky Law, P.A. alleging unjust enrichment in connection with shareholder
litigation commenced by such firm related to the AIU Merger and claiming damages of $
| F-32 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Certain subsidiaries of the Company that operate hotel
assets have not paid employment related taxes such as required withholdings for Texas State unemployment taxes and federal income tax
and employee and employer contributions for FICA (Social Security and Medicare) taxes, and federal unemployment tax for the period from
December 31, 2018, to December 31, 2019. These subsidiaries have since made the appropriate filings with the Internal Revenue Service
and the Company has accrued the full estimated amount of the underpaid taxes as well as the estimated penalties and interest. As of December
31, 2020, the amount of the estimated taxes, penalties, and interest, assuming that there is no waiver or mitigation of the penalties,
is $
In addition, from time to time, the Company becomes involved in litigation matters in the ordinary course of its business. Such litigations include an action that alleges negligence and other claims regarding the death of a resident in a memory care facility. For example, the case entitled Michael Inderrieden, Individually and as Personal Representative of the Estate of Thomas Inderrieden v. MCA Simpsonville Operating Company, LLC dba Memory Care of Simpsonville; Allied Integral United, Inc. d/b/a Clearday; Memory Care America, LLC.; MCA Management Company, Inc.; Clearday Management, Ltd.; and MC-Simpsonville, SC-1-UT, LLC, filed June 28, 2021, in the Court of Common Pleas for Greenville County, South Carolina, bearing Civil Action Nos. 2021-CP-23-03071 (Wrongful Death) & 2021-CP-23-03076 (Survival Action), is currently pending, and asserts claims for survival and wrongful death. Such action has been referred to the Company’s insurance carrier and is in the discovery phase of litigation. Although the Company is unable to predict with certainty the eventual outcome of any litigation, the Company does not believe any of its currently pending litigation is likely to have a material adverse effect on its business.
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 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 the Company’s subsidiaries.
We have been fully indemnified by James Walesa for all obligations that the Company may incur with respect to an adverse judgement against
the Company, including any post-judgement interest. Such indemnification by James Walesa is under an agreement dated as of July 30, 2020.
Under such agreement, James Walesa receives a fee equal to
Subsequently, an amendment to the indemnification agreement above was signed on January 19, 2021, in which additional securities were pledged on behalf of James Walesa for all obligations that Company may incur with respect to an adverse judgement and/or any post-judgement interest. In the event that Mr. Walesa is required to make any payments under this amended indemnification agreement, then Company will issue shares of AIU Care, AIU Warrants and AIU Common Stock at $ per unit as well as Series A Preferred at $ per unit, for the amount of such payment.
| F-33 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Superconductor Merger Commitment.
During the year ended on December 31, 2021, the Company
agreed to pay Superconductor $
In connection with the AIU Merger, the
liability to certain former officers of Superconductor was incurred under the terms of Officer Agreements, which may be paid in
Common Stock. The total value owed was accrued as of December 31, 2021, and is included in the net assets acquired in the AIU Merger
in the amount of $
Basic net income (loss) per common share is calculated by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of common shares and potentially dilutive securities outstanding for the period. For the Company’s diluted earnings per share calculation, the Company uses the “if-converted” method for preferred stock and convertible debt and the “treasury stock” method for Warrants and Options.
| Dilution shares calculation | For the year ended December 31, | |||||||
| 2022 | 2021 | |||||||
| Series A Convertible Preferred Stock | ||||||||
| Series F 6.75% Convertible Preferred Stock | ||||||||
| Series I 10.25% Convertible Preferred Stock | ||||||||
| Limited Partnership Units | ||||||||
| Warrants | ||||||||
| Stock Options | ||||||||
| Total participating securities | ||||||||
9. Related Party Transactions
Background.
The Related Party Disclosures Topic provides disclosure requirements for related party transactions and certain common control relationships. Accounting and reporting issues concerning certain related party transactions and relationships are addressed in other Topics.
Information about transactions with related parties is useful in comparing an entity’s results of operations and financial position with those of prior periods and with those of other entities. It helps users of financial statements to detect and explain possible differences.
As a result of the AIU Merger and the rules pursuant to IRC section 382 management does not believe there is any significant net operating losses to carry forward.
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”) prior to December 31, 2018, made loans to us under revolving credit notes that bear interest at 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. Such amounts due as December 31, 2022 and 2021 are stated in Note 6 “Indebtedness.”
The
Company owes Richard Morris, our General Counsel $
We use the services of Galleros Robinson, Certified Public Accountants,
LLP, a CPA and Advisory firm, for certain accounting services in the ordinary course. Richard Levychin is a partner of this firm. We paid
this firm approximately $
| F-34 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Guarantees.
From time-to-time certain officers and directors
will personally guarantee a loan. There is a guaranteed 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
10. Non-Consolidated Investment
During
the year ended December 31, 2021, the Company sold its investment in one of their non-consolidated entities, Westover Town Center
for a consideration of $
11. Acquisitions
On May 28, 2021, the Company acquired all
the equity interests of Primrose Wellness Group LLC (“Primrose”), a San Antonio, Texas licensed adult day care facility
that provides affordable daily care services, including ADLs (activities of daily living), nursing services, physical rehabilitative
services and other supportive services, primarily to military veterans, including those with VA benefits. The Company offers
services, including its proprietary Clearday Restore services, which provides a combination of aromatherapy and massage therapy
designed to help people with a wide range of lifestyle limiting conditions and uses its robotic services at Primrose. The Company
acquired Primrose for a cash purchase price in the amount of $
12. Deficit
In connection with the merger (“AIU Merger”), the certificate of incorporation of Clearday, Inc. was amended. Prior to such an amendment, under the charter of Clearday, Inc. (which was the charter of STI), there were authorized shares of Common Stock and authorized shares of preferred stock, each par value $ per share. The certificate of incorporation of Clearday, Inc., as amended in connection with the AIU Merger, provides for authorized shares of Common Stock and authorized shares of preferred stock, each par value $ per share.
Common Stock
Liquidation Preference.
In the event of the Company’s liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all the Company’s debts and other liabilities and the satisfaction of any liquidation preferences that may be granted to the holders of any then outstanding shares of preferred stock.
| F-35 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Rights and Preferences.
Holders of common stock have no preemptive, conversion or subscription rights, and there is no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock, which the Company may designate and issue in the future.
Voting Rights.
Subject to supermajority votes for some matters, matters
shall be decided by the affirmative vote of the Company’s stockholders having a majority in voting power of the votes cast by the
stockholders present or represented and voting on such matter, provided that the holders of the Company’s common stock are not allowed
to vote on any amendment to the Company’s certificate of incorporation that relates solely to the terms of one or more series of
preferred stock if the holders of such affected series are entitled, either separately or together with the holders or one or more such
series, to approve such amendment. The affirmative vote of the holders of at least 75% of the votes that all of the Company’s stockholders
would be entitled to cast in any annual election of directors and, in some cases, the affirmative vote of a majority of minority stockholders
entitled to vote in any annual election of directors are required to amend or repeal the Company’s bylaws, amend or repeal certain
provisions of the Company’s certificate of incorporation, approve certain transactions with certain affiliates, or approve the sale
or liquidation of the Company.
Preferred Stock
Prior
to the AIU Merger, AIU had Series A
The Company has shares of Series
F
The Series A Preferred Stock of the Company
that was issued and outstanding prior to the AIU Merger remains issued and outstanding. Such preferred stock has a $par
value, shares
authorized, and shares
issued and outstanding as of December 31, 2022 and 2021. Except for a preference on liquidation of $
Dividends and Distributions
For the years ended December 31, 2022 and 2021, the Company accrued dividends for the 6.75% Series F preferred stock in the amount of $
| F-36 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Warrants
The Company has three separate types of warrants that are outstanding:
| ● | warrants that were granted and outstanding by Superconductor Technologies Inc. (“STI”) prior to the effective date of the AIU Merger; | |
| ● | warrants assumed by the Company that were granted by AIU prior to the September 9, 2021, effective date of the AIU Merger; add | |
| ● | warrant that were issued by the Company after the AIU Merger. |
The following is a summary of such outstanding warrants at December 31 2022:
STI Warrants Prior to the AIU Merger Effective Date.
| Common Shares | ||||||||||||||
| Total | Currently Exercisable | Exercise Price per Share | Expiration Date | |||||||||||
| Warrants related to March 2018 financing | $ | |||||||||||||
| Warrants related to March 2018 financing | $ | |||||||||||||
| Warrants related to July 2018 financing | $ | |||||||||||||
| Warrants related to July 2018 financing | $ | |||||||||||||
| Warrants related to May 2019 financing | $ | |||||||||||||
| Warrants related to October 2019 financing | $ | |||||||||||||
| Warrants related to October 2019 financing | $ | |||||||||||||
Warrants that were issued by AIU and have been assumed by Clearday in the AIU Merger.
| Common Shares | ||||||||||||||
| Total | Currently Exercisable | Exercise Price per Share | Expiration Date | |||||||||||
| Warrants issued in connection with financings * | $ | |||||||||||||
| Warrants issued to a consultant ^ | $ | |||||||||||||
| * | ||
| ^ |
Lender Additional Remedy Warrants:
Each of the following warrants were issued in connection with a financing and provides that the warrant may only be issued upon an event of default under the related promissory note.
| Common Shares | ||||||||||||||
| Outstanding | Exercisable | Exercise Price | Maturity Date | |||||||||||
| Related to the January 12, 2023, Financing (Mast Hill LP) | $ | * | ||||||||||||
| Related to the September 30, 2022, Financing (Mast Hill LP) | $ | * | ||||||||||||
| Related to the July 1, 2022, Financing (Mast Hill LP) | $ | * | ||||||||||||
| * |
Lender Warrants:
| Common Shares | ||||||||||||||
| Related to the February 17, 2023, Financing (Jefferson Street Capital LLC) | $ | |||||||||||||
| Related to the January 12, 2023, Financing (Mast Hill LP) | $ | |||||||||||||
| F-37 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Derivative Calculation
During the year ended December 31, 2022, the Company calculated the fair value of the warrants granted based on assumptions used in the Cox-Ross-Rubinstein binomial pricing model using the following inputs: the price of the Company’s common stock on the date of issuance ranging from $ to $; risk-free interest rates ranging from % to %; volatility ranging from % to % based on the historical volatility of the Company’s common stock; exercise prices of $; and terms of sixty months.
Stock Options
On December 31, 2021, we continued to have the two active equity award option plans, the 2003 Equity Incentive Plan and the 2013 Equity Incentive Plan (collectively, the “Stock Option Plan”) that were in effect for STI prior to the effective date of the AIU Merger. Although we can only grant new options under the 2013 Equity Incentive Plan. Under our Stock Option Plan, stock awards were made to our former directors, key employees, consultants, and non-employee directors and consisted of stock options, restricted stock awards, performance awards, and performance share awards. Stock options were granted at prices no less than the market value on the date of grant. There were no stock option exercises during the year ended December 31, 2021. None of the option grantees continued in service after the effective date of the AIU Merger. The expiration date for all the options under the Stock Option Plan granted to any officer, director or consultant is generally the last day of the three (3)-month period following the date that such person ceases their continuous status in such capacity, subject to certain accelerated termination events that are not applicable. All outstanding stock options were to officers and directors whose service terminated on September 9, 2021, in connection with the AIU Merger. No such options were exercised, and all such options expired on December 8, 2021.
Restricted Stock
On March 31, 2021, AIU issued an additional total shares of restricted common stock to executives of AIU representing approximately shares of Clearday, Inc. Common Stock. For the year ended on December 31, 2022, shares issued of restricted common stock vest over and the Company valued the shares at $ per share, on the date of the agreement.
| F-38 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Equity of Subsidiary
Non-Controlling Interest
In November 2019, a certificate of incorporation
was filed by AIU Alt Care for its Series I
In October 2019, AIU Alt Care formed AIU Impact
Management, LLC and they formed Clearday OZ Fund, which is managed by AIU Impact Management, LLC, as the general partner. For the years
ended December 31, 2022, and 2021, approximately $
The exchange rate for each of the Alt Care Preferred
Stock and the Clearday OZ LP Interests to Clearday, Inc.
Non-Controlling Interest Loss Allocation.
The Company applied ASC810-10 guidance to correctly
allocate the percentage of loss attributable to the NCI of each company. For the year ended December 31, 2022, the net income for AIU
Alt Care was $
Cumulative Convertible Preferred Stock and Limited Partnership Interests in Subsidiaries (NCI).
For the year ended December 31, 2022 no additional shares of AIU Alt Care Preferred Stock or Clearday OZ LP Interests were issued. For the year ended December 31, 2021, shares of AIU Alt Care Preferred Stock were outstanding, and units of Clearday OZ LP Interests were outstanding.
The terms and conditions of the Alt Care Preferred
Stock and the Clearday OZ LP Interests allow the investors in such interests to exchange such securities into the Company’s common
stock at the conversion price equal to 80% of the 20 consecutive day volume weighted closing price of the Common Stock of Clearday preceding
the conversion date. For the years ended December 31, 2022 and 2021, AIU Alt Care and Clearday OZ Fund had outstanding
Each warrant has a term of
| F-39 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Dividends
on the Alt Care Preferred Stock and preferred distributions on the units of limited partnership interests in Clearday OZ Fund are at
each calendar quarterly month end at the applicable dividend rate (
Each of the Company, AIU Alt Care and Clearday OZ Fund shall redeem the Alt Care Preferred Stock or the units of limited partnership interests on the 10 Year Redemption Date that is ten years after the final closing of the offering. The securities provide for a redemption in cash or shares of common stock at the option of Clearday, Inc., in an amount equal to the unreturned investment in the Alt Care Preferred Stock or units of limited partnership interests. Upon consummation of certain equity offerings prior to May 1, 2022, AIU Alt Care may, at its option, redeem all or a part of the Alt Care Preferred Stock for the liquidation preference plus a make-whole premium. In addition, upon the occurrence of, among other things (i) any change of control, (ii) a liquidation, dissolution, or winding up, (iii) certain insolvency events, or (iv) certain asset sales, each holder may require the Company to redeem for cash all such holder’s then outstanding shares of Alt Care Preferred Stock.
The Certificate of Designation also sets forth certain limitations on the Company’s ability to declare or make certain dividends and distributions and engage in certain reorganizations. The limited partnership agreement has similar provisions.
Subject to certain exceptions, the holders of Alt Care Preferred Stock and the units of limited partnership interests have no voting power and no right to vote on any matter at any time, either as a separate series or class or together with any other series or class of shares of capital stock or partnership interests, and are not be entitled to call a meeting of such holders for any purpose, nor are they entitled to participate in any meeting of the holders of the Company’s common stock or participate in the management of Clearday OZ Fund by its general partner.
13. Temporary Equity – Mezzanine
The Company has shares of preferred stock authorized, par value $ per share, including designated as Series F Preferred Stock and shares outstanding as of December 31, 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 then outstanding Series F Preferred Stock shall be entitled to be paid a liquidation preference (“Preference Amount”) out of the assets of the Company available for distribution to its stockholders equal to the original issue price and, plus any accumulated and unpaid dividends. As the payment of this Preference Amount is not solely within the control of the Company, the Series F Preferred Stock does not qualify as permanent equity and has been classified as mezzanine or temporary equity. The Series F Preferred Stock is not redeemable, and it was not probable that there would be a Liquidation Event as of December 31, 2022. Therefore, the Company is not currently required to accrete the Series F Preferred Stock to the aggregate liquidation value.
14. Income Taxes
The Company did t recognize a benefit or provision for income taxes for the years ended December 31, 2022, and December 31, 2021.
As a result of the AIU Merger that closed on September 9, 2021, and the rules pursuant to Internal Revenue Code Section 382, management does not believe that there is any significant net operating loss carry forward.
For the year ended December 31, |
||||||||
| 2022 | 2021 | |||||||
| Current tax provision (benefit): | ||||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| Total current tax benefit | ||||||||
| Deferred Tax provision: | ||||||||
| Federal | ||||||||
| State | ||||||||
| Total deferred tax provision | ||||||||
| Total tax provision | $ | $ | ||||||
For the year ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Taxes at statutory U.S. federal income tax rate | % | % | ||||||
| State and local income taxes, net of federal tax benefit | % | % | ||||||
| Other differences, net | % | % | ||||||
| Valuation allowance | - | % | - | % | ||||
| Effective tax rate | % | % | ||||||
| F-40 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
15. Subsequent Events
We evaluated subsequent events and transactions occurring after December 31, 2022, through the date of this Report.
Viveon Merger
Merger Agreement
On April 5, 2023, the Company entered into a Merger Agreement (the “Merger Agreement”), by and among the Company, Viveon Health Acquisition Corp., a Delaware corporation (“Viveon” or “Viveon Health”), VHAC2 Merger Sub, Inc., a Delaware corporation (“Merger Sub”), Viveon Health LLC, a Delaware limited liability Company, in the capacity as the representative from and after the Effective Time (as defined in the Merger Agreement) for the stockholders of Viveon (other than the Company Stockholders (as defined in the Merger Agreement)) as of immediately prior to the Effective Time (and their successors and assigns) in accordance with the terms and conditions of the Merger Agreement, and the Company SR LLC, a Delaware limited liability company, in the capacity as the representative from and after the Effective Time for the holders of Company Preferred Stock (as defined in the Merger Agreement) as of immediately prior to the Effective Time (and their successors and assigns) in accordance with the terms and conditions of the Merger Agreement. Pursuant to the terms of the Merger Agreement, a business combination between Viveon and the Company will be effected through the Viveon Merger of Merger Sub with and into the Company, with the Company surviving the Viveon Merger as a wholly owned subsidiary of Viveon and Viveon will change its name to “Clearday Holdings, Inc.” (the “Merger”). The board of directors of the Company has (i) approved and declared advisable the Merger Agreement, the Merger and the other transactions contemplated thereby and (ii) resolved to recommend approval of the Merger Agreement, the Merger and related transactions by the stockholders of the Company.
Merger Consideration
The
total consideration to be paid at Closing (the “Merger Consideration”) by Viveon to the Company security holders (and holders
who have the right to acquire the Company capital stock) will be an amount equal to $
In
addition, the holders of Company Preferred Stock will have the contingent right to earn up to
If, following the Closing Date and prior to end of the Earnout Eligibility Period, there is a Change of Control, then, immediately prior to such Change of Control, all the Earnout Shares not yet earned shall be earned by the Company Earnout Holders and shall be released from escrow and delivered to the Company Earnout Holders, and the Company Earnout Holders shall be eligible to participate in such Change of Control transaction with respect to such Earnout Shares.
The Earnout Shares will be placed in escrow and will not be released from escrow until they are earned as a result of the occurrence of the Earnout Milestone or a Change of Control, if applicable. The Earnout Shares that are not earned on or before the expiration of the Earnout Eligibility Period shall be automatically forfeited and cancelled.
Cancellation of Securities. Each share of the Company capital stock, if any, that is owned by Viveon, Merger Sub, the Company, or any of their subsidiaries (as treasury stock or otherwise) immediately prior to the effective time of the Merger (the “Effective Time”), will automatically be cancelled and retired without any conversion or consideration.
Preferred Stock. At the Effective Time, each issued and outstanding share of the Company’s Series F Cumulative Convertible Preferred Stock, par value $ per share (the “Company Series F Preferred Stock”) (other than any such shares of the Company capital stock cancelled as described above and any dissenting shares), will be converted into the right to receive: (A) one (1) share of Parent New Series F Preferred Stock plus (B) a number of Earnout Shares in accordance with, and subject to the contingencies, set forth in the Merger Agreement.
Each issued and outstanding share of the Company’s Series A Convertible Preferred Stock, par value $ per share (“Series A Preferred Stock”) (other than any such shares of the Company capital stock cancelled as described above and any dissenting shares), will be converted into the right to receive: (A) one (1) share of Parent New Series A Preferred Stock plus (B) a number of Earnout Shares in accordance with, and subject to the contingencies, set forth in the Merger Agreement.
Common
Stock. At the Effective Time, each issued and outstanding share of the Company’s common stock, par value $ per share
(the “Company Common Stock”) (other than any such shares of the Company capital stock cancelled as described above and any
dissenting shares) will be converted into the right to receive a number of shares of Viveon Common Stock equal to the Conversion Ratio.
The “Conversion Ratio” as defined in the Merger Agreement means an amount equal to (a)
| F-41 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Stock Options. At the Effective Time, each outstanding option to purchase shares of the Company Common Stock will be converted into an option to purchase, subject to substantially the same terms and conditions as were applicable under such options prior to the Effective Time, shares of Viveon Common Stock equal to the number of shares subject to such option prior to the Effective Time multiplied by the Conversion Ratio, at an exercise price per share of Viveon Common Stock equal to the exercise price per share of the Company Common Stock subject to such option divided by the Conversion Ratio.
Warrants. Contingent on and effective as of immediately prior to the Effective Time, each outstanding warrant to purchase shares of the Company Preferred Stock or the Company Common Stock will be treated in accordance with the terms thereof.
Convertible Notes. Contingent on and effective as of immediately prior to the Effective Time, the Company’s convertible notes outstanding as of immediately prior to the Effective Time, will be treated in accordance with the terms of the relevant agreements governing such convertible notes.
Subsidiary Capital Stock. At and as of the Effective Time, the Alt Care Preferred Stock and the Clearday OZ LP Interests (collectively, the “Subsidiary Capital Stock”) will remain in full force and effect with the right to acquire the Viveon Common Stock with such adjustments noted in the terms of such Subsidiary Capital Stock.
Representations and Warranties
The Merger Agreement contains customary representations and warranties of the parties thereto with respect to, among other things, (a) corporate existence and power, (b) authorization to enter into the Merger Agreement and related transactions; subsidiaries, (c) governmental authorization, (d) non-contravention, (e) capitalization, (f) corporate records, (g) consents, (h) financial statements, (i) internal accounting controls, (j) absence of certain changes, (k) properties; title to assets, (l) litigation, (m) material contracts, (n) licenses and permits, (o) compliance with laws, (p) intellectual property, (q) privacy and data security, (r) employee matters and benefits, (s) tax matters, (t) real property, (u) environmental laws, (v) finders’ fees, (w) directors and officers, (x) anti-money laundering laws, (y) insurance, (z) related party transactions, and (aa) certain representations related to securities law and activity. Viveon has additional representations and warranties, including (a) issuance of shares, (b) trust fund, (c) listing, (d) board approval, (e) SEC documents and financial statements, (f) certain business practices, (g) expenses, indebtedness and other liabilities and (h) brokers and other advisors.
Covenants
The Merger Agreement includes customary covenants of the parties with respect to operation of their respective businesses prior to consummation of the Merger and efforts to satisfy conditions to consummation of the Merger. The Merger Agreement also contains additional covenants of the parties, including, among others, access to information, cooperation in the preparation of the Registration Statement and Proxy Statement (as each such terms are defined in the Merger Agreement) required to be filed in connection with the Merger and to obtain all requisite approvals of each party’s respective stockholders. Viveon and the Company have each also agreed to include in the Proxy Statement the recommendation of its respective board that its stockholders approve all of the proposals to be presented at its respective special meeting. In addition, each of Viveon and the Company have agreed to use commercially reasonable efforts to solicit and finalize definitive documentation for a committed equity in an aggregate amount that, together with the funds in the Trust Account after giving effect to potential redemptions from Viveon’s public stockholders, together with financing programs available to the Company after the Closing, will provide to the Company working capital to meet its short term commercial development goals.
Viveon has also agreed to prepare a proxy statement to seek the approval of its stockholders (the “Extension Proposal”) to amend its organizational documents to extend the period of time Viveon is afforded under its organizational documents and IPO prospectus to consummate an initial business combination for an additional three months, from June 30,2023 to September 30, 2023 (or such earlier date as Viveon and the Company may agree in writing).
Each party’s representations, warranties and pre-Closing covenants will not survive Closing and no party has any post-Closing indemnification obligations.
Viveon Equity Incentive Plan, Viveon has agreed to approve and adopt an equity incentive plan (the “Incentive Plan”) to be effective as of the Closing and in a form mutually acceptable to Viveon and the Company, subject to approval of the Incentive Plan by the Viveon stockholders. The Incentive Plan will provide for an initial aggregate share reserve equal to of the number of shares of Viveon Common Stock issued and outstanding at the Closing and an “evergreen” provision that is mutually agreeable to Viveon and the Company will provide for an automatic increase on the first day of each fiscal year in the number of shares available for issuance under the Incentive Plan as mutually determined by Viveon and the Company.
| F-42 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Non-Solicitation Restrictions
Each of Viveon and the Company has agreed that from the date of the Merger Agreement to the Effective Time or, if earlier, the valid termination of the Merger Agreement in accordance with its terms, it will not initiate any negotiations with any party relating to an Alternative Transaction (as such term is defined in the Merger Agreement) or enter into any agreement relating to such a proposal, other than as expressly excluded from the definition of an Alternative Transaction. Each of Viveon and the Company has also agreed to be responsible for any acts or omissions of any of its respective representatives that, if they were the acts or omissions of Viveon and the Company, as applicable, would be deemed a breach of the party’s obligations with respect to these non-solicitation restrictions.
Conditions to Closing
The
consummation of the Merger is conditioned upon, among other things, (i) the absence of any applicable law or order restraining, prohibiting
or imposing any condition on the consummation of the Merger and related transactions, (ii) the expiration or termination of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) receipt of any consent, approval or authorization
required by any Authority (as defined in the Merger Agreement), (iv) Viveon having net tangible assets of at least $
Solely with respect to Viveon and Merger Sub, the consummation of the Merger is conditioned upon, among other things, (i) the Company having duly performed or complied with all of its obligations under the Merger Agreement in all material respects, (ii) the representations and warranties of the Company, other than certain fundamental representations as defined in the Merger Agreement, being true and correct in all respects unless failure would not have or reasonably be expected to have a Material Adverse Effect (as defined in the Merger Agreement) on the Company or any of its subsidiaries, (iii) certain fundamental representations, as defined in the Merger Agreement, being true and correct in all respects, other than de minimis inaccuracies, (iv) no event having occurred that would result in a Material Adverse Effect on the Company or any of its subsidiaries, (v) the Company and its securityholders having executed and delivered to Viveon each Additional Agreement (as defined in the Merger Agreement) to which they each are a party and (vi) the Company delivering certain certificates to Viveon.
Solely with respect to the Company, the consummation of the Merger is conditioned upon, among other things, (i) Viveon and Merger Sub having duly performed or complied with all of their respective obligations under the Merger Agreement in all material respects, (ii) the representations and warranties of Viveon and Merger Sub, other than certain fundamental representations as defined in the Merger Agreement, being true and correct in all respects unless failure to be true and correct would not have or reasonably be expected to have a Material Adverse Effect on Viveon or Merger Sub and their ability to consummate the Merger and related transactions, (iii) certain fundamental representations, as defined in the Merger Agreement, being true and correct in all respects, other than de minimis inaccuracies, (iv) no event having occurred that would result in a Material Adverse Effect on Viveon or Merger Sub, (v) the Amended Parent Charter (as defined in the Merger Agreement) being filed with, and declared effective by, the Delaware Secretary of State, (vi) Viveon delivering certain certificates to the Company, (vii) the size and composition of the post-Closing board of directors of Viveon having been appointed as set forth in the Merger Agreement and (viii) Viveon, Viveon Health LLC (“Sponsor”) and other stockholders, as applicable, having executed and delivered to the Company each Additional Agreement to which they each are a party.
| F-43 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Termination
The Merger Agreement may be terminated at any time prior to the Effective Time as follows:
(i) by either Viveon or the Company, if (A) the Merger and related transactions are not consummated on or before the latest of (i) June 30, 2023, (ii) if the Extension Proposal is approved, September 30, 2023 and (iii) if one or more extensions to a date following September 30, 2023 are obtained at the election of Viveon, with Viveon stockholder vote, in accordance with the Viveon’s amended and restated certificate of incorporation, the last date for Viveon to consummate a business combination pursuant to such extensions; and (B) the material breach or violation of any representation, warranty, covenant or obligation under the Merger Agreement by the party seeking to terminate the Merger Agreement was not the cause of, or resulted in, the failure of the Closing to occur on or before the Outside Closing Date, without liability to the other party;
(ii) by either Viveon or the Company, if any Authority has issued any final decree, order, judgment, award, injunction, rule or consent or enacted any law, having the effect of permanently enjoining or prohibiting the consummation of the Merger, provided that, the party seeking to terminate cannot have breached its obligations under the Merger Agreement and such breach was a substantial cause of, or substantially resulted in, such action by the Authority; and
(iii) by mutual written consent of Viveon and the Company duly authorized by each of their respective boards of directors.
Certain Related Agreements
Parent Support Agreements. Concurrently with the execution of the Merger Agreement, Viveon, the Company and the Sponsor and the officers and directors of Viveon entered into a support agreement (the “Parent Support Agreement”) pursuant to which the Sponsor and the officers and directors of Viveon have agreed to vote all shares of Viveon common stock beneficially owned by them, including any additional shares of Viveon they acquire ownership of or the power to vote: (i) in favor of the Merger and related transactions, (ii) against any action reasonably be expected to impede, delay, or materially and adversely affect the Merger and related transactions, and (iii) in favor of an extension of the period of time Viveon is afforded to consummate an initial business combination.
Company Support Agreements. Concurrently with the execution of the Merger Agreement, Viveon, the Company and certain stockholders of the Company entered into a support agreement (the “Company Support Agreement”), pursuant to which such the Company stockholders have agreed to vote all common and preferred stock of the Company beneficially owned by them, including any additional shares of the Company they acquire ownership of or the power to vote, in favor of the Merger and related transactions and against any action reasonably be expected to impede, delay, or materially and adversely affect the Merger and related transactions.
Lock-Up Agreements. In connection with the Closing, certain the Company stockholders will each agree, subject to certain customary exceptions, not to (i) offer, sell contract to sell, pledge or otherwise dispose of, directly or indirectly, any Lockup Shares, (ii) enter into a transaction that would have the same effect, (iii) enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of the Lock-Up Shares or otherwise, (iv) engage in any short sales or other arrangement with respect to the Lock-Up Shares or (v) publicly announce any intention to effect any transaction specified in clause (i), (ii) or (iii) until the date that is six months after the Closing Date (the “Lock-Up Period”). The term “Lockup Shares” mean the Merger Consideration Shares and the Earnout Shares, if any, whether or not earned prior to the end of the Lock-up Period, together with any other shares of Viveon Common Stock, and including any securities convertible into, or exchangeable for, or representing the rights to receive Viveon Common Stock, if any, acquired during the Lock-up Period. If the closing price of Viveon Common Stock equals or exceeds $ per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations) for any 20 trading days within any 30-trading day period following the Closing Date, of the Lock-up Shares will be released from the lock-up. The existing escrow provisions of Viveon Common Stock held by certain stockholders will remain in effect.
| F-44 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
Amended and Restated Registration Rights Agreement. At the Closing, Viveon will enter into an amended and restated registration rights agreement (the “Amended and Restated Registration Rights Agreement”) with certain existing stockholders of Viveon and the Company with respect to their shares of Viveon Common Stock acquired before or pursuant to the Merger, and including the shares issuable on conversion of the warrants issued to the Sponsor in connection with Viveon’s initial public offering and any shares issuable on conversion of loans or other convertible securities. The agreement amends and restates the registration rights agreement Viveon entered into on December 22, 2020 in connection with its initial public offering. Subject to the Lock-Up Agreements described above, the holders of a majority of the shares held by the existing Viveon stockholders, and the holders of a majority of the shares held by the Company stockholders will each be entitled to make one demand that the Company register such securities for resale under the Securities Act, or two demands each if Viveon is eligible to use Form S-3 or a similar short-form registration statement. In addition, the holders will have certain “piggy-back” registration rights that require Viveon to include such securities in registration statements that Viveon otherwise files. The registration rights agreement does not contain liquidating damages or other cash settlement provisions resulting from delays in registering Viveon’s securities. Viveon will bear the expenses incurred in connection with the filing of any such registration statements.
The foregoing descriptions of agreements and the transactions and documents contemplated thereby are not complete and are subject to and qualified in their entirety by reference to the Merger Agreement, form of Parent Support Agreement, form of Company Support Agreement, form of Lock-Up Agreement, and form of Amended and Restated Registration Rights Agreement, copies of which are filed or incorporated as filed as exhibits to this Report.
In
connection with the Viveon Merger the Company has solicited additional investment that would close prior the Viveon Merger Closing or
“bridge financing” and has received approximately $
Lease Terminations.
On
March 31, 2023, the Company entered into agreements 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. The termination
of each of the Community Leases was effective May 1, 2023, the date (“Community Lease Termination Date”) that a new operator
that was selected and approved by the Lessor (“New Operator”) obtained all required government licenses, authorizations,
and approvals to operate the memory care residential facilities in Texas and Arkansas. 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 $
In
connection with the Lease Termination Agreement, 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 $
| F-45 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
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.
Additional Financings. The Company incurred additional debt financings from institutional lenders:
1. Mast Hill Financing January 2023.
On
January 13, 2023, the Company incurred a loan in the principal amount of $
| F-46 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
2. 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 $
The
1800 Note provides for a one year maturity. Monthly payments on the 1800 Note of approximately $
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.
3. 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.
This Jefferson Street Note provides for the
proceeds to us of approximately $
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 shares of the Company’s Common Stock at an exercise price per share of $. The Jefferson
Street Warrant expires five years from
| F-47 |
Clearday, Inc.
Notes to Audited Consolidated Financial Statements
4. Convertible Notes
From
February 17, 2023 to April 10, 2023, a subsidiary of the Company, AIU Alternative Care, Inc. (“Innovative
Care”), issued convertible unsecured promissory notes (each, a “Convertible Note” and collectively, the “Convertible
Notes”) to lenders in a private placement of such securities, including related persons. The aggregate gross proceeds of such Convertible
Notes are approximately $
| ● | The
issuance by Innovative Care or the Company or any of its other subsidiaries of any equity securities in one or more offerings with
aggregate gross proceeds of at least $ | |
| ● | The
issuance by the Company or any of its other subsidiaries of convertible debt securities that were issued with gross proceeds in an
aggregate amount of at least $ | |
| ● | The listing by the Company or its common stock to the New York Stock Exchange, the NYSE American or any tier of the NASDAQ market in connection with an offering of securities by the Company or any of its subsidiaries in connection with any merger, consolidation or similar transaction with another person in which the Company is the surviving entity; or | |
| ● | The exchange of the shares of the Company’s common stock for the common stock or other security that is listed on the New York Stock Exchange, the NYSE American or any tier of the NASDAQ market in connection with any merger, consolidation or similar transaction with another person in which Clearday is not the surviving entity or in which Clearday becomes a subsidiary of such other person, including without limitation, any special purpose acquisition corporation. |
5. Sale Repurchase Transaction
On May 22, 2023, Stockdale Associates, Ltd.
(“Stockdale”), a wholly owned subsidiary of Clearday, Inc. entered into a sale-repurchase transaction with James Walesa,
the Chief Executive Officer of the Company, for the land of approximately
Equity Issuances
On
January 27, 2023, the Company issued shares of the Company’s Common Stock was issued in consideration of approximately
$
| F-48 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 25th day of May, 2023.
| CLEARDAY, INC. | ||
| By: | /s/ James T. Walesa | |
| James T. Walesa | ||
| President and Chief Executive Officer | ||
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James T. Walesa, his attorney-in-fact, with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| Signature | Title | Date | ||
| /s/ James T. Walesa | President, Chief Executive Officer and Director | May 25, 2023 | ||
| James T. Walesa | (Principal Executive Officer) | |||
| /s/ BJ Parrish | Director / Acting Chief Financial Officer | May 25, 2023 | ||
| BJ Parrish | ||||
| /s/ Elizabeth M. Caveness | Director | May 25, 2023 | ||
| Elizabeth M. Caveness | ||||
| /s/ Alan Channing | Director | May 25, 2023 | ||
| Alan Channing | ||||
| /s/ Jeffrey A. Coleman | Director | May 25, 2023 | ||
| Jeffrey A. Coleman | ||||
| /s/ Richard Levychin | Director | May 25, 2023 | ||
| Richard Levychin |
| 66 |