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Leases
9 Months Ended
Sep. 30, 2023
Leases  
Leases

5. Leases

 

Lease Terminations

 

On March 31, 2023, the Company entered into agreements (collectively, the “Lease Transition Agreement”) to terminate the leases (“Community Leases”) for three of its four residential care facilities, which account for all of Clearday’s leased residential care facilities. The Community Leases related to residential communities (the “Communities”) located in Westover, Texas, New Braunfels, Texas and Little Rock, Arkansas. Terminating the Community Leases removed the related ROU assets and ROU liabilities as of March 31, 2023. Additionally, the related net leasehold improvements and personal property in these Communities were written off. We currently have no material economic rights or obligations under the Community Leases other than for payment obligations under the Lease Transition Agreements. The Lease Transition Agreement provided, among other matters, that the aggregate liability of the Clearday subsidiaries that are tenants under the Community Leases are reduced to amount (the “Repayment Amount”) that is equal to the sum of: (1) past due rent payments under the Community Leases of $1,284,770 (“Past Due Community Lease Amounts”), (2) a fixed amount arising from the termination of the Community Leases of $1,710,777 (“Rent Differential Amount”), (3) the amount of additional advances (“Critical Expenses Advances”) by landlord to pay critical expenses plus the premium for tail insurance policy in favor of the landlord (the obligation for such premiums are limited $275,000), (4) plus an additional amount that is equal to the greater of $25,000 or 5% of such Critical Expenses Advances. The Critical Expense Advances and additional amount were determined in the second quarter of 2023. The Repayment Amount is due and payable over a period maturing on July 31, 2025, as follows: (1) on closing date of the proposed Viveon Merger with Viveon, a payment equal to 10% of the new money that is raised in connection with the Viveon Merger (subject to a minimum payment of $300,000 and a maximum payment of $500,000); provided that if the Viveon Merger did not close by July 31, 2023, then a payment of $300,000 (the “Down Payment”) was scheduled to be paid on July 31, 2023, or such other date agreed by Landlord and Clearday, which under the terms of the amendment to the Lease Transition Agreement, has been extended to December 31, 2023 subject to certain additional extensions. (2) $400,000 payable quarterly commencing on December 31, 2023, and (3) beginning with the calendar quarter ending December 31, 2023, 10% of the Excess Cash Flow, generally based on earnings before interest, taxes, depreciation, and amortization of Clearday. The current guarantors of the Community Leases (a subsidiary of Clearday, Inc. and two individuals) continued to guaranty the obligations, as modified by the Lease Transition Agreement, and provided a security interest on the collateral specified in such guarantees. The Lease Transition Agreement was amended by the First Amendment (“LTA First Amendment”) entered into on September 8, 2023, effective July 31, 2023, and the Second Amendment (“LTA Second Amendment”) entered into on December 20, 2023, effective December 15, 2023. The LTA Second Amendment (1) extended the due date for the Down Payment to December 31, 2023 and (2) increased the Down Payment amount by an extension fee of $50,000, which amount is in addition to the $15,000 extension fee payable under the LTA First Amendment.

 

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

 

In connection with the proposed termination of the Community Leases, the subsidiaries that operate the Communities (the “Current Operators”) and subsidiaries of the New Operator (“New Communities Operators”) entered into the previously reported Operations Transfer Agreement dated as of April 1, 2023, (the “OTA”). 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. The New Communities Operators have employed, or offered employment to, all of our employees at these communities and will fund and be responsible for any operating cash losses for the Communities.